Ownership, technological capabilities and exports of garment firms in Myanmar.
Rasiah, Rajah ; Myint, Myo Myo
JEL Classification: L6, O14, O31, O33.
Introduction
Myanmar is the second largest country in Southeast Asia after
Indonesia, sharing borders with Bangladesh, India, China, Laos and
Thailand. It is endowed with rich natural resources including minerals,
precious stones, timber, oil and natural gas. When independence from
British was granted in 1948, Myanmar experienced an instable economic
regime for a decade followed by repressive isolationist policies.
Export-orientation was introduced in the 1990s after the military
government came to power. Along with the transition to a market economy,
incentives were introduced to attract investment under the foreign
direct investment (FDI) laws enacted in 1988. Labor-intensive garment
manufacturing became an important recipient of foreign direct investment
since. Further efforts at increasing the scope of private sector
activity included: permission for the opening of private commercial
banks, lifting of restrictions on trade, foreign equity, improvements in
the legal and regulatory framework, physical infrastructure and the
establishment of industrial zones after the promulgation of the Private
Industrial Enterprise Law in 1990. These developments stimulated a
massive expansion in garment manufacturing, which accounted for 48.6% of
overall exports of Myanmar in 2000 (WTO 2012).
Least Developed Countries (LDCs) such as Myanmar also benefitted
from preferential access to export markets following the termination of
the Multi-Fiber Arrangement (MFA) that governed clothing trade at the
end of 2004. Although the momentum of growth arising from such
preferential treatment in the garment sector was hampered when the
United States' subsequently imposed economic sanctions on Myanmar
in 2003, garment exports has gradually risen again through rapid growth
in exports to Japan, and through third countries. The European Union has
also remained an important market.
Wages are no longer the only important pillar of competitiveness in
garment manufacturing as other factors have begun to assume increasing
prominence. Competitiveness in export markets cannot be maintained
without at least adaptive changes to technology. In low end segments of
garment manufacturing although competing firms may rely on easily
absorbable technologies their capacity to compete requires the
development of adaptive capabilities to continuously reduce costs,
defects and delivery times, and raise quality (Rasiah 1994). While many
studies have analyzed the determinants and inter-firm differences that
contribute to performance differences between foreign and national
firms, there has been little work examining the relationship between
technological capabilities and export performance by ownership in low
end industries in the LDCs. Because developed markets demand
standardized quality, price and delivery times of low margin firms
targeting such markets ought to show similar technological capabilities
irrespective of ownership. However, with their stronger firm-specific
assets foreign firms in LDCs can easily relocate capabilities from home
to host sites and also operate on a large scale compared to national
firms who will have to acquire or develop capabilities from scratch
(Dunning 1995; Rasiah 2009; Narula, Dunning 2010).
Hence, this paper seeks to examine if foreign controlled garment
firms in Myanmar enjoy higher export intensities and technological
capabilities than national firms. Higher export and technological
capabilities in foreign firms can offer national firms the potential of
learning through demonstration effect and the hiring of experienced
personnel from the former. The realization of such a potential by
national firms in a LDC will depend on the capacity of the embedding
institutions, which as Hirschman (1970) had noted, will rest
considerably on the policies of the host-government. There currently
exists a lacuna in the literature on the capacity of national firms to
upgrade in the presence of foreign firms in LDCs. The rest of the paper
is organized as follows. Section 1 discusses the development of garment
manufacturing in Myanmar. Sections 1 and 2 present the theoretical
guide, and the methodology and data respectively. Section 3 analyses
statistically the significance of ownership in exports and technological
capabilities. The paper finishes with the conclusions.
1. Garment manufacturing
Like several other LDCs, Myanmar began to receive strong inflows of
FDI in garment manufacturing since the second half of the 1990s as
efforts were underway to terminate the Multi-Fibre Agreement by 2004.
The preferential access agreements with the United States and the
European Union in particular drove export growth in the Myanmar garment
sector, though low wages and set-up costs helped as well. Whether owned
by foreign equity or national firms export-oriented garment firms
largely specialized in cut, make, and pack (CMP) activities. Most
foreign firms were multinational subsidiaries from Korea, Taiwan, Hong
Kong and other Asian countries. Buyers abroad do everything but
production, who undertake the marketing and links with the retail chains
and design of clothes with detailed specifications, and in many cases
procure and supply raw materials to the garment firms in Myanmar (Kudo
2005; Rasiah, Ofreneo 2009).
There were 25 national firms in Myanmar when the pioneering foreign
firm from South Korea relocated in 1996, which was followed by firms
from Taiwan and Hong Kong after 1997 (Myint 2011). The establishment of
these firms not only motivated major buyers to take advantage of
Myanmar's LDC quota but were also motivated by the growth of
domestic firms engaged in export markets. With more buyers looking into
Myanmar, national entrepreneurs were able to set up small, medium and
even large operations to supply niche high volume and labour intensive
markets. Also, a large proportion of foreign garment firms use national
subcontractors in order to meet stiff deadlines. The number of firms
engaged in the export sector rapidly increased to almost 300 firms in
1999.
The number of garment firms in Myanmar peaked at 400 in 2001, which
included about 100 small national firms that focused on specialized
subcontract orders (MGMA 2010). There were 75 foreign firms in 2001. The
total employment in the garment industry was estimated at around 135,000
persons in 2001.
Under pressure for human rights abuse in the United States and
Europe, garment manufacturing in Myanmar began to face serious problems
from the early 1990s. Although the foreign firms survived through their
international networks, local firms faced severe difficulties in
securing orders, including bureaucratic red tape, a problematic multiple
exchange rate and poor infrastructure. The final blow came in 2003 when
the United States government imposed sanctions on Myanmar. As a result,
around 55 foreign, 185 national firms shut down operationsas export
orders contracted leading to an estimated retrenchment of 70,000-80,000
workers in 2003-04 (Myint, Rasiah 2012). The number of foreign garment
firms fell to 20 in 2004.
Myanmar's main garment export targets were the United States,
European Union and East Asia before the US imposed economic sanctions in
2003. The United States more than doubled its imports from US$185.7
million in 1999 to US$403.5 million in 2000 (Myint 2011:Table 2.8). The
United Kingdom is the second largest buyer followed by Germany.
Fortunately for Myanmar the fall in exports to the United States has
been somewhat offset by a rise in exports to Japan. Garment exports to
Japan in dollar value terms increased threefold from 2003 to 2007 (Fig.
1). Exports to Japan accounted for 0.5% of total garment exports in 1997
but this share rose to 4.3% in 2003 and 34.4% in 2007. Also, the number
of firms registered with the Myanmar Garment Manufacturers Association
(MGMA) grew slightly with foreign and national firms totalling 23 and
107 respectively in 2010 (Myint 2011).
[FIGURE 1 OMITTED]
Myanmar is an interesting country for examining the role of foreign
equity in the development of technological capabilities as it is a LDC
starting at the bottom of the technology ladder, and has managed to
break in and expand in a technology-using industry where the
decomposition of production on the basis of the Babbage principle has
enabled the relocation of low value added activities associated with CMP
operations. It is important to investigate if the opportunity offered by
such a link to global value chains is translated into export synergies
and technological upgrading in Myanmar. Although this is a difficult
proposition as CMP operations in several countries have enjoyed little
technological upgrading, (1) it is an opportunity for especially a
country with large labor reserves such as Myanmar to use the opportunity
to upgrade through the development of meso organizations in training,
testing, logistics coordination as successfully undertaken by national
firms in Korea, Taiwan, Hong Kong, India, China, Malaysia and Indonesia
(Rasiah, Ofreneo 2009).
Also, unlike the moribund operations associated with Maquiladoras
where in-bond processing and assembly of imported inputs for export are
carried out in tariff and tax free locations without much value added
recorded at host-sites (Fatemi 1990), Myint (2011) reported that garment
firms in Myanmar sourced 25% of their inputs domestically, which is
higher than the commensurate percentage of 10-20% in Sri Lanka and 20%
in Vietnam in 2004. Hence, the industry may have the resource endowments
for it to be rooted in Myanmar with the right policies.
2. Concept and theory
As presented by Gereffi (1994) and Sturgeon and Gereffi (2009),
brand holders and giant retailers in the developed countries largely
determine the location and terms of garment production, while
manufacturers are forced to compete for orders by constantly lowering
the cost of labor and increasing the speed of production (turnaround
time) often with considerable flexibility to absorb quick changes in
customer taste (Bailey et al. 1993; Singleton 1997). In such segments of
garment production differences in performance between countries and
between firms within the country are influenced by differences in
skills, wages, scale and technology. With the increasing demands made on
the workforce in terms of multiple higher-order skills, firm-level
training is important to complement formal education. (2) Because
export-oriented firms in low cost and margin, and high volume production
require scale and operative flexibility, firms show fairly strong
technological capabilities to compete in external markets (Rasiah 1994;
Lall 1999). Technological capabilities is the main concept of the paper,
and the three key relationships reviewed from past works are between
one, ownership and export-intensity; two, ownership and technological
capabilities; and three, export-intensity and technological
capabilities. We also examine in this section the influence of the
control variables of age, wages and size on the explanatory variables.
2.1. Technological capabilities
Marx (1957) and Schumpeter (1934) had already demonstrated the
significance of technology and innovation in driving growth. Schumpeter
(1934) referred to 'creative destruction' to technical change
that arises from innovations that rely on existing stocks of knowledge
in sectors facing low barriers to innovation. Firms either marry
different types of knowledge or adapt existing stocks of knowledge to
generate new processes, products and organizational structures that help
lower costs and delivery times and increase flexibility and quality.
Neo-Schumpeterians referred to 'creative accumulation'
activities to knowledge paths that connect and lead to the opening up of
newer paths by large firms in sectors characterized by high barriers to
entry (Malerba 2005). Such path-dependent breakthroughs are important to
generate new cycles of innovation. (3) Evolutionary economics models
added further emphasis to the understanding of technology by advancing
the concept of systems of innovation and its composition as a
constellation of economic agents (firms and institutions) and the
relationships between them (Freeman 1987, 1989; Lundvall 1992; Nelson,
Winter 1982). Nelson (2008) showed that the functioning and change in
each system is uniquely different, non-linear and heterogeneous in
nature. However, because the garment industry is a technology user and
is dominated by labor-intensive production methods, the focus in the
paper is on technological capabilities that at most will come near Mark
I activities. The operations in an underdeveloped LDC such as Myanmar
are expected to be well behind the technological frontier.
In discussing capabilities, it is important to address the dynamic
management capabilities advanced by Teece (2009). Teece (2009)
articulated the concept of dynamic capabilities by referring to skills,
processes, routines, organizational structures, and disciplines that
enable firms to build, employ, and orchestrate intangible assets
relevant to satisfying customer needs, and which cannot be readily
replicated by competitors. Using this logic one can see the need for
firms to strengthen their managerial (including the components of
personnel, production, accounting, engineering, marketing and
entrepreneurial) capabilities. While this is indeed a strategic
dimension of capabilities that firms acquire or develop to compete, the
focus of this paper is on technological capabilities. Nevertheless, the
technological aspects of management capabilities are embodied in
personnel, techniques, routines, machinery, organizational and layout
restructuring that can be captured in process technology, and product
engineering, designing and marketing involving product technology
(Rasiah 2010). However, because of the nature of garment manufacturing
in LDCs where the value chains are driven by buyers abroad, firms
generally do not relocate or develop significant levels of marketing
capabilities at host locations.
Also, while acknowledging its powerful influence on synergizing
national firms, we choose not to use technological spillovers in the
paper as it is often non-pecuniary in nature and it falls outside
market-based transactions (Scitovsky 1964; Rosenstein-Rodan 1984; Rasiah
1994). Given that a significant amount of knowledge spillover never gets
appropriated by economic agents it may not be meaningful to attempt
estimating them at all (Rasiah 2008). Hence, conforming to the
evolutionary characteristics, this paper uses the concept of
technological capabilities, which refer to 'tangible and intangible
assets' firms acquire or develop to compete (Lall 1992). Given its
estimation on the basis of embodied technologies, it allows the capture
of capabilities firms possess and have at their disposal to carry out
certain specified activity. The specific categories, phases and
processes of technological change were analysed lucidly by Rosenberg
(1976). Rosenberg and Frischtak (1985) defined technological capability
as a process of accumulating technical knowledge or a process of
organizational learning. Dahlman et al. (1987) emphasized the underlying
concept of capability deepening as firms move from technology-using to
innovation-driving production capabilities. The sequence of capabilities
they developed--running from production capability through investment
capability to innovation capability became the basis of the taxonomies
of technological capabilities developed by Bell (1986) and Lall (1992).
Three categories of technology flows were grouped together by Bell
(1986). Flow A consisted of capital goods and technological, engineering
and management services. Flow B consisted of the skills and know-how to
operate and maintain the newly established production technology. Flow C
consisted of the knowledge and expertise to implement technical change,
or the 'know-why'. In this framework, flow A led to an
improvement in production capability, flow B contributed to
technological capability at the basic and routine levels, and flow C
enabled the firm to generate dynamic technical and organizational
change.
The functional categorization of technological capabilities based
on the tasks facing a manufacturing firm was subsequently outlined by
Lall (1992). He divided the capabilities associated with the tasks into
two groups: investment capabilities and production capabilities. These
were further subdivided into three levels of capabilities: a basic level
consisting of simple and experience-based capabilities; an intermediate
level consisting of adaptive and duplicative but research-based
capabilities; and an advanced level consisting of innovative and risky
but also research-based activities.
Wei (1995) integrated Lall's functional categories with
Bell's technology flow classification. He concluded, first, that
not all technology flows generate technological capability, and second,
that linkages with national supplier and other firms in a national
economy are critical for enhancing capability. Rasiah (2010) drew on
these contributions to focus on production capabilities only,
establishing in the process a typology of capabilities based on the
depth and trajectory of knowledge among firms. This framework allowed
the measurement of three different types of embodied technological
capability: human resources, process technology and product technology
so as to facilitate the estimation of the overall technological
capability(TC) of a firm.
2.2. Ownership and exports
Foreign firms tend to dominate export activities from LDCs because
of their superior access to global markets. Many of these firms relocate
low value added labor-intensive activities in countries that offer them
location specific advantages to export. The prime motive of foreign
firms relocating in Myanmar is to access the preferential quota
privileges provided by the developed countries, though, wages and land
costs are also lower than the rival sites in the rest of Southeast and
East Asia (Rasiah 2009). This also fits into Dunning's (1995)
eclectic paradigm of OLI where both ownership (market access) and
location (host-site's quota privileges and low wages) conditions
were instrumental in foreign firms relocating operations in Myanmar. The
former obviously offers the potential for host-sites to appropriate
export market synergies.
Foreign firms also generate export synergies in the domestic
economy at host-sites either through subcontracting or demonstration
effect (Caves 1974). Where the embedding environment is supportive
national firms gradually grow to compete with firms in export markets.
Indeed, Hirschman (1970) argued lucidly that export-orientation by
multinationals offer the scale for the expansion of backward linkages in
the host site. Hence, while the greater market access of foreign firms
is likely to be reflected in higher export-intensities, national firms
in especially countries with small domestic markets are also likely to
participate in export markets. However, given the lack of financial
resources and marketing capabilities in national firms, only some of
them are likely to enjoy relatively high export-intensities.
The inductive approach through the brainstorming session with
officials of MGMA and pilot interviews with five firms show that
ownership should be positively correlated with export intensities
because of their superior access to global markets and technological
support from their foreign plants. Hence, we hypothesize that foreign
firms will show higher export intensities than national firms.
2.3. Technological capabilities and exports
Marx (1957) had argued that competition forces firms to replace old
modes of technology with new ones, which Schumpeter (1934) referred to
as the gales of creative destruction. Firms thus equip themselves with
the minimum threshold of technological capabilities to compete in export
markets. Whereas foreign firms relocate standardized capabilities from
parent plants abroad (Vernon 1966), national firms either acquire or
develop them in-house to compete in export markets. However, when the
host-site involved is a LDC endowed with poor infrastructure, firms
undertake adaptive engineering operations to reduce defects, improve
quality and shorten delivery times (Rasiah 2011).
Also, purely on the basis of scale, exporting will generate a
positive impact on firm-level technological capabilities (Smith 1776;
Hirschman 1958, 1970). Lileeva and Trefter (2010) provided evidence from
Canadian firms to show that exposure to export markets increased both
innovation and labour productivity. However, the relative importance of
export-intensities by ownership may differ especially with the
specificity of the industry. If competitive multinationals are involved,
their superior experience and tacit relationships in global markets will
generally make firms enjoying majority foreign equity more
export-intensive than national firms located in small domestic markets.
Helleiner (1973) had argued that the decomposition of production into
different stages actually helped raise not only investment and
employment but also exports from host-sites in developing economies.
This premise holds well with Myanmar as the relocation of multinational
firms was targeted at export-oriented production. Hence, we hypothesize
that technological capabilities will be positively correlated with
export-intensities.
2.4. Ownership and technological capabilities
Garment manufacturing in Myanmar is undertaken by foreign
subsidiaries and national firms equipped with original equipment
manufacturing capabilities to carry out CMP operations. Because Myanmar
integrated in global garment value chains in the 1990s when national
firms were not equipped with significant technological capabilities,
foreign firms are likely to dominate export sales from the country.
Foreign firms internalize their production capabilities through the
relocation of process and human resource capabilities at host sites to
export from subsidiary locations. This fits into Dunning's (1995)
eclectic paradigm of ownership, location and internalization (OLI) where
both ownership (production technology and market access) and location
(host-site) conditions were instrumental in foreign firms relocating
operations in Myanmar. The former obviously offers the potential for
host-sites to appropriate technological and export market synergies.
With no serious competition from national firms and weak basic and high
tech infrastructure, foreign firms tend to specialize in
production-based technologies using human resource and process
technology capabilities to meet quantitative fluctuations in orders and
quick changes in designs.
Given the lack of supporting R&D infrastructure in Myanmar,
firms are unlikely to demonstrate technological capabilities beyond
adaptive and quick turnaround capabilities to continuously lower
production costs, replacement times, delivery times, and raise quality.
Typically the large retail marts and brand holders undertake the
promotion of brands (and sometimes designs), while foreign subsidiaries
supply the OEM capabilities to the operators in Myanmar. Especially
firms from East Asia either supply the technology and orders to their
own subsidiaries in Myanmar or acquire them from national firms. Since
external markets demand a certain threshold of technological capability
only firms capable of delivering it participate in exporting. Foreign
firms with superior endowments abroad tend to enjoy higher technological
capabilities than national firms, though national firms will need some
threshold of technological capabilities to compete in export markets.
Hence, we hypothesize that foreign firms will enjoy higher technological
capabilities than national firms.
2.5. Control variables of age, wages and size
While ownership, exports and technological capabilities are the
explanatory variables used in the paper, it is also important to
identify important control variables that past studies have established
to be significant. Past works show that the relationship between age and
exports is ambiguous. On the one hand, firms with more export experience
might have higher export performance because their experience may offer
them longer connection with the international supply chain. On the other
hand, newer plants often export more because they can start with newer
machinery and equipment, which can raise productivity and product
quality (Ramstetter 1999; Jongwanich 2010; Rasiah 2011). Interestingly,
foreign firms in the sample show longer years of operation than national
firms, which supports our interviews that modern garment manufacturing
in Myanmar was started off by foreign firms. However, given the runaway
nature of a number of foreign garment firms owing to the uncertainty
associated with in-bond operations and market access quotas, age may not
be a significant relationship with exports and technological once
controlled for other variables.
Also, wages was used to control for labour market effects. In
theory, skilled workers are paid higher wages so that they can raise
productivity. Indeed, export markets require high quality and hence
skilled workers often command a wage premium (Schank et al. 2007).
However, firms producing low end garments and competing on the basis of
price may actually prefer to hire low wage workers.
Firm size is often regarded by researchers as a critical variable
in explaining export behavior and success (Aw et al. 2011). Industrial
district (Marshall 1920; Piore, Sabel 1984; Rasiah 1994; Pyke,
Sengenberger 1992) exponents argue that SMEs are better allocators and
coordinators of resources and production owing to their flexibility and
agility to enter and exit markets. Unlike the impersonal large firm,
SMEs are considered to provide greater room for horizontal relationships
that support trust and social capital. In addition, Audretsch (2002) and
Acs and Audretsch (1988) produced evidence from the United States to
argue that SMEs participate more in R&D activities than large firms.
Unlike the dynamic methodology used to capture relationships by
industrial district exponents, Audretsch (2002), Acs and Audresch (1988)
and Rasiah (1994) used statistical evidence to argue over the allocative
and flexibilityadvantages of small firms. However, given the
specificity of low value added low margin operations involving
export-oriented CMP garment manufacturing, scale is likely to play an
important role to support exporting activities.
The primary focus of the paper is then to compare
export-intensities and technological capabilities by ownership, and to
examine the relationship between export-intensities and technological
capabilities of garment firms in Myanmar controlling for age, wages and
size. Higher export-intensities and technological capabilities in
foreign firms offer the potential for knowledge spillovers to national
firms, which will depend on the embedding support provided by meso
organizations at the host-site.
3. Data and methodology Consistent with evolutionary approaches
(Nelson 2008), we carried out a brainstorming session with the MGMA
officials and five pilot firms to understand the specificity of garment
manufacturing operations in Myanmar before testing the relationships
between the explanatory variables. Primary data was collected from
garment firms in Myanmar using a structured sampling framework on the
basis of ownership and size. The breakdown of the 72 firms that
responded to our survey were 22 enjoying foreign equity of 50% and more
and 50 firms with less than 50% or zero foreign equity. The MGMA
assisted with the collection of the data. Unless otherwise stated, the
data reported is for July 31, 2010.
The methodology used in this exercise was adapted from Rasiah
(2011) with the aim of contributing to the existing literature on
understanding the relationship between ownership, technological
capabilities and export-orientation in low value added low margin
operations located in a LDC site that offers preferential access to
developed countries' markets.
3.1. Specification of variables
Two sets of variables are specified in this section. The
explanatory variables were specified first followed by the control
variables.
Export Intensity
Export intensity was measured as follows:
Export Intensity = [X.sub.i]/[Y.sub.i],
where X and Y refer to exports and gross output respectively of
firm i in 2010.
Technological Capabilities
Drawing on Rasiah (2011), technological intensity (TI) was measured
by incorporating the three proxies HR, process technology (PT), and
adaptive engineering (AE) intensities. These three capabilities
constitute the estimation of technological intensity used in the paper.
Human Resource
HR intensity is expected to have a positive relationship with
export intensities. HR intensities were measured as follows:
HR = 1/3 [[TM.sub.i], [TE.sub.i], [CHR.sub.i]],
where TM, TE, and CHR refer to training mode, training expenditure
in payroll, and the number of cutting-edge HR practices used by the firm
i, respectively. TM was measured by assigning the value of 4 if the firm
had a separate training centre, 3 if the firm had a training department,
2 if the firm had staffwith training responsibilities, and 1 if the firm
sent employees for training outside. TE was estimated by dividing
training expenditure with payroll of firm i. CHR was measured by a score
of 1 for each of the cutting-edge HR practices ticked by firm
I--teamwork, informal work-related contact between managers and
employees, multi-skilling and cross-department skilling, employee
participation in small group innovation activities, continual learning,
and clear guidelines for promotion. The proxies were then normalized as
follows:
Normalization Score = ([X.sub.i] - [X.sub.min])/([X.sub.max] -
[X.sub.min]), (1)
where [X.sub.i], [X.sub.min], and [X.sub.max] refer to the ith,
minimum, and maximum values of the proxy X.
Process Technology
Process technology (PT) intensity refers to capabilities related to
machinery and equipment, processes and quality control techniques used.
PT was measured as follows:
PT = 1/2 [[QM.sub.i], [QIC.sub.i]]
where QM and QIC refer to the quality of machinery and equipment,
and cutting-edge quality, and inventory control systems, respectively.
Likert scale scores ranging from 1 to 7 (world class to dated) were used
to measure QM, and QIC was estimated by adding a value of one to the use
of each cutting-edge quality and inventory control practice reported by
the firms--materials requirement planning (MRP), materials resource
planning (MRP1), statistical process control (SPC), quality control
circles (QCC), emphasis on reducing defects, and emphasis on shortening
throughput times. QM and QIC were then normalized using the same formula
used in the computation of HR (1).
Adaptive Capabilities
The pilot survey showed that manufacturing firms in Myanmar were
only engaged in minor process and product adaptations and organizational
restructuring using engineering capabilities. None of the firms reported
any expenditure on R&D, R&D personnel in their payroll or any
outsourced R&D contract. Hence, adaptive capabilities (AC) rather
than R&D is used in the paper to denote a stage before R&D.
Higher levels of AE intensity are expected to be correlated with higher
levels of export-intensity, and was estimated as follows:
AC = 1/2 [[AME.sub.i], [AP.sub.i]],
where AME and AP refer to Likert scale (1-7) measure of intensity
of adaptation of machinery and equipment, and adaptation to products of
firm i. The values were normalized so that AC obtains a possible minimum
value of 0 and maximum possible value 1 for export-intensity, and 3 for
technological capability.
Technological capability (TC) was then measured by using the
formula:
[TC.sub.i] = [HR.sub.i] + [PT.sub.i] + [AC.sub.i].
Given no a priori qualifications on the greater significance of any
one of the three technological capabilities, and because their
significance is likely to vary with the location offirms in the overall
technological trajectories (Rasiah 2011), no attempt was made to weight
technological capabilities.
Ownership
Ownership is the last explanatory variable examined in the paper
and was estimated as follows:
FO = 1 if foreign equity is 50% or more; FO = 0 otherwise.
Control Variables
The variables of Age, size and wages were used to examine the
influence of instrumental variables.
Age
Because the values of the dependent variables of export-intensity
vary between 0 and 1, and technological capability vary between a
minimum possible value of 0 and a maximum possible value of 3, age was
estimated as follows:
A = Ln (years of export experience).
Wage
Wages was estimated by taking the total amount of salaries per
month and dividing it by the number of workers. Monthly wages were then
converted from the national currency of Kyat to US$ with the appropriate
exchange rate. (4) Because the values of the dependent variables of
export-intensity vary between 0 and 1, and technological capability vary
between a minimum possible value of 0 and a maximum possible value of 3,
wage in the regressions was estimated as follows:
W = Ln (total monthly salaries/total numbers of employees).
Size
The values of the dependent variables of export-intensity vary
between 0 and 1, and technological capability vary between a minimum
possible value of 0 and a maximum possible value of 3, and hence, firm
size was estimated as follows:
Firm size, S = Ln (total number of employees).
3.2. Statistical exercise
Two sets of statistical exercises were carried out to determine the
importance of foreign ownership in Myanmar's garment manufacturing
sector. The first uses descriptive statistics to examine statistical
differences. The second uses regressions to test the hypotheses of the
paper by controlling for other influences. The first and second
hypotheses can be expressed statistically as follows:
X/Y = F(TI, FO, W, S, A). (2)
The third hypotheses of the paper can be expressed as follows:
TI = F(FO, W, S, A). (3)
A correlation test was carried out between the independent
variables to remove multicolinearity problems. The variables of TI, FO,
W and S show excessive correlations so that the use of any two of them
on the right hand side of the equations produced biased coefficients
(Table 1). Hence, four regressions were carried out to estimate the
coefficients of independent variables against the dependent variable of
X/Y and three regressions were undertaken to estimate the coefficients
of the independent variables against the dependent variable of TI.
OLS was preferred when the dependent variable used was X/Y. Tobit
regressions were preferred when the values of the dependent variable,
TI, as it is censored on the left (minimum possible value of 0) and on
the right (maximum possible value of 3) (Greene 2011). The following
equations were specified:
OLS: X/Y = [alpha] + [[beta].sub.1]FO + [[beta].sub.2]A + [mu]; (4)
OLS: X/Y = [alpha] + [[beta].sub.1]TI + [[beta].sub.2]A + [mu]; (5)
OLS: X/Y = [alpha] + [[beta].sub.1]W + [[beta].sub.2]A + [mu]; (6)
OLS: X/Y = [alpha] + [[beta].sub.1]S + [[beta].sub.2]A + [mu]; (7)
Tobit: TC = [alpha] + [[beta].sub.1]FO + [[beta].sub.2]A + [u]; (8)
Tobit: TC = [alpha] + [[beta].sub.1]W + [[beta].sub.2]A + [mu]; (9)
Tobit: TC = [alpha] + [[beta].sub.1]S + [[beta].sub.2]A + [mu].
(10)
We did not undertake separate ownership-based regressions because
of the small number of foreign firms at twenty two in the sample. There
was only a population of 23 foreign firms in Myanmar in 2010.
3.3. Statistical data
The descriptive statistics of the results are presented in Tables 2
and 3. Table 2 presents data of all members of MGMA. Table 3 presents
data of sample generated from the survey. Based on establishment
numbers, the industry is dominated by national firms, which accounted
for 107 of the garment firms registered with the MGMA in 2010 (Table 2).
Foreign firms (including joint-ventures) accounted for 23 of the member
firms. However, the mean size of foreign firms (742 workers) was much
larger than national firms (266 workers). Foreign firms (794 machines)
also had a much higher mean number of sewing machines than national
firms (150 machines). National firms (0.56) had a slightly higher mean
sewing machine per worker ratio than foreign firms (0.50).
The sampled firms show that foreign firms are more export-oriented
with minimum and maximum export intensities ranging from 60% to 100%
while that of national firms ranged from 20% to 100% (Table 3).
Nevertheless, the data collected shows that some national firms raised
their export share from 93% in 2007 to 100% in 2010. Foreign firms
enjoyed higher minimum and maximum TC than national firms. This was the
same in all the three components of technological capabilities.
Interviews show that foreign firms use superior process technology drawn
from their parent plants than national firms.
Foreign firms enjoyed much higher minimum and maximum employment
size than national firms. Foreign firms also enjoyed higher minimum and
maximum values of wages and export experience than national firms. The
mean monthly wage paid by foreign firms (US$ 47.51) was higher than that
of national firms (US$ 33.40). Against a minimum wage of US$ 65 in
Cambodia in 2009, (5) isolation from the United States and the lack of
minimum wage legislation in Myanmar has kept minimum wages at US$ 31.65
by foreign firms and US$ 18.22 by national firms.
4. Statistical analysis
The results of the two exercises are analyzed in this section.
Statistical differences using the Levene's two-tail t-tests are
examined in the first sub-section while multiple regressions results are
analyzed in the second subsequent sub-section.
4.1. Statistical differences
The Levene's two-tail 't' test of means shows that
foreign firms enjoyed higher export intensities and technological
capabilities than national firms (Table 4). Also, some national firms
have achieved complete export-orientation and strong technological
capabilities. Nevertheless, some national firms enjoyed higher
technological capabilities (including the components of HR, PT and AC)
than some foreign firms as the maximum values of the former were higher
than the minimum values of the latter. A few national firms have
acquired and developed technological capabilities comparable to foreign
firms to compete with them in export markets.
Foreign firms also enjoyed higher wage and employment size, and the
results are statistically significant. Given the small demand in the
domestic market, it is understandable that the superior production and
market access capability of foreign firms accessed from their parent
plants abroad have ensured that these firms show higher export
intensities and technological capabilities than national firms. With
higher capital endowments and larger market access foreign firms also
were able to pay higher wages and employ more workers than national
firms.
Overall, the analysis of statistical differences shows that foreign
firms enjoy higher export-intensities, technological capabilities,
employment size and wages than national firms, thereby suggesting that
the former can potentially provide knowledge spillover to the latter.
However, consistent with Hirschman's (1970) argument, this
potential can only be realized if the host-government can create and
strengthen the institutional support for its appropriation by national
firms.
4.2. Statistical analysis
The OLS and Tobit regressions produced interesting results. The
model fit (F-stat and log likelihood) was statistically significant for
the interpretation of results (Table 5). All regressions also passed the
Cooke-Wiesberg test for heteroskedasticity.
The relationship between foreign ownership and export-intensity is
positive and highly significant (1% level) confirming the first
hypothesis of the paper. The relationship between technological
capability and export-intensity was also positive and highly significant
(1%level), confirming the second hypothesis of the paper. Size was also
statistically significant confirming that larger firms are more
export-oriented than smaller firms in Myanmar's garment
manufacturing sector. The relationship between export-intensities and
wages was also positive and strong (1% level), showing that higher wages
has been instrumental in supporting higher export-intensities.
The relationship between foreign ownership and technological
capabilities is positive and highly significant (1% level), confirming
the third hypothesis of the paper. Size and wages were also positively
correlated with technological capabilities. Hence, larger firms show
higher technological capabilities than smaller firms, and firms paying
higher wages show higher technological capabilities than firms paying
lower wages.
The influence of the instrumental variables show that size and
higher wages have been important in supporting export competitiveness
and technological capabilities in Myanmar's garment manufacturing
industry. The evidence shows that even in a technology using industry
such as garments and in LDC locations, higher wages (premium enjoyed by
skilled workers) rather lower wages is the driver of competitiveness and
technological capabilities. Scale has been important in garment
manufacturing as specialization in just CMP activities requires large
volume to enjoy aggregate profits because of the small margins. Foreign
firms show the potential for offering strong economic and technological
synergies to the domestic economy as they show higher export-intensities
and technological capabilities than national firms.
Overall, all three hypotheses are supported by the evidence from
garment firms in Myanmar. Also, foreign firms demonstrated significantly
higher export-intensities and technological capabilities than national
firms demonstrating that they can potentially offer positive knowledge
spillovers for its appropriation by national firms. The fact that a few
national firms have higher export intensities and technological
capabilities than some foreign firms all the more reinforces the view
that positive knowledge spillovers are possible. Large size and higher
wages support higher export-intensities and technological capabilities.
Conclusions
It can be seen that the garment industry, which began to contract
initially from economic sanctions imposed by the United States in 2003,
has continued to operate in Myanmar. Opportunities from market openings
elsewhere has continued to drive export growth from the industry, albeit
slowly. It is under such conditions that differences in export
intensities and technological capabilities between foreign and national
firms were examined in this paper. Interestingly, even under such a
depressed political and infrastructure environment, foreign firms
generally enjoyed higher export and technological capabilities than
national firms. Whereas foreign firms enjoy superior mean technological
capabilities (and the components of HR, process and adaptive
capabilities) than national firms, a few national firms that show strong
export intensities and technological capabilities demonstrate the
potential that knowledge spillovers can be realized by national firms if
the government of Myanmar strengthens the institutions and related
supporting meso organizations. These findings strengthen the
evolutionary argument that empirical specificity is important to capture
the real drivers of technical change at host sites, which is also worth
being investigated in LDCs (Nelson 2008).
Technological capabilities and export-intensities are highly and
positively correlated, which is in line with the famous Smith (1776) and
Young (1928) dictum, that causation between the two goes both ways. This
along with the statistically highly significant higher
export-intensities enjoyed by foreign firms over national firms suggests
that there are export and technological synergies that national firms
can potentially appropriate from the demonstration effect shown by
foreign firms in Myanmar.
With garment firms in Myanmar sourcing a quarter of their inputs
domestically in 2004, and technological upgrading occurring in large
export-oriented national firms, the evidence suggests that the country
may be able to support a more viable industry than the Maquiladoras in
Latin America provided the government pursues institutional
strengthening. Hence, it will help the government of Myanmar to take
steps to make the country an attraction again for foreign firms by
bringing back greater stability and security. There should also be
efforts to assist national firms with financial, marketing and
technological support to stimulate further their participation in export
markets. Given that small national firms are more vulnerable to external
shocks than foreign and large national firms as evidenced from the many
shutdowns following the American economic sanctions in 2003, the
government must offer strong support through the creation and
strengthening of meso organizations to assist them. National firms and
Myanmar workers will also have much to benefit if the democratization
that is taking place since the second half of 2011 leads to the lifting
of sanctions by the United States, the government strengthens the basic
infrastructure and training organizations, and introduces in the country
labour covenants of the International Labor Organization.
Caption: Fig 1. Garment exports, Myanmar 1997-2010
doi: 10.3846/20294913.2013.869513
Acknowledgement
We wish to thank the editor and three anonymous referees for their
constructive comments. The usual disclaimer applies.
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Rajah RASIAH obtained his Doctorate in Economics from Cambridge
University in 1992. He currently holds the post of Professor of
Technology and Innovation Policy at University of Malaya, and his
research focus is on the economics of technological change and
technology policy.
Myo Myo MYINT obtained her Doctorate from University of Malaya in
2012. She is currently employed by the Friedrich Ebert Stiftung in
Yangon. Her current research focus is on the development of the garment
industry in Myanmar.
Rajah RASIAH, Myo Myo MYINT
Department of Development Studies, Faculty of Economics and
Administration Building, University of Malaya, 50603 Kuala Lumpur,
Malaysia
Received 08 September 2011; accepted 14 April 2012
Corresponding author Rajah Rasiah
E-mail: rajah@um.edu.my
(1) Barrientos (2008) produced evidence to show how several
labor-contracting locations in the developing world only serve to reduce
the bargaining position of workers and undermine the real application of
codes of conducts by transnational firms.
(2) Basic schooling and high literacy rates may be sufficient to
absorb simple technologies.
(3) Although innovation capabilities are a dynamic concept its
meaning is very broad as it encompasses the creation of something new in
the interest of individuals, markets, governments and societies,
including ideas and services rather than just products, processes and
technologies (Wikipedia 2012). It is because of this, the narrower
concept of technological capabilities is preferred here.
(4) We used the average exchange rate of K 1200 to one US$ of the
year 2007.
(5) Data supplied by Chettra on 25 June 2011 from the National
Planning Ministry, Phnom Penh.
Table 1. Correlation coefficient matrix, independent variables,
Garment firms, Myanmar, 2010
A FO S TI W
A 1.000 0.214 0.298 0.131 0.252
FO 0.214 1.000 0.490 * 0.524 * 0.643 *
S 0.298 0.490 * 1.000 0.521 * 0.303 *
TI 0.131 0.524 * 0.521 * 1.000 0.345 *
W 0.252 0.643 * 0.303 * 0.345 * 1.000
Note: * Excessive correlation.
Source: Computed from Authors' Survey (2010)
Table 2. Characteristics of firms and capabilities, Garment
Industry, Myanmar, 2010
Particulars Foreign National Total
Number of firms 23 107 130
Number of workers 14170 29550 43720
Number of sewing machines 7140 16649 23789
Workers per firm (Numbers) 742 266 336
Sewing machines per firm 794 150 183
Sewing machines per worker 0.50 0.56 0.54
Source: MGMA (2010)
Table 3. Descriptive statistics, Garment firms, Myanmar, 2010
Minimum Maximum
Foreign National Foreign National
X/Y 0.60 0.20 1.00 1.00
TC 0.99 0.73 2.44 2.04
PT 0.42 0.17 0.83 0.83
AC 0.00 0.00 1.00 0.63
HR 0.33 0.19 1.00 0.57
AGE 3.00 7.00 20.00 15.00
A 1.95 1.10 3.00 2.71
WAGE (US$) * 31.65 18.22 63.25 45.00
W 3.46 2.90 4.15 3.81
Size 125 100 2800 1800
S 4.83 4.61 7.94 7.50
Standard Deviation
Foreign National
X/Y 0.13 0.23
TC 0.35 0.37
PT 0.14 0.15
AC 0.23 0.21
HR 0.18 0.17
AGE 3.39 2.70
A 0.28 0.32
WAGE (US$) * 9.35 5.83
W 0.21 0.19
Size 688.69 368.01
S 0.73 0.65
* Note: *Mean monthly wages of individual firms used in the
estimation.
Source: Computed from Authors' Survey (2010)
Table 4. Two tailed t-tests of critical variables, Garment firms,
Myanmar, 2010
Mean
Foreign National Mean difference t
X/Y@ 0.949 0.566 0.383 7.304 *
TC# 1.731 1.263 0.468 5.005 *
PT# 0.674 0.467 0.208 5.825 *
AC# 0.401 0.225 0.184 3.157 *
HR# 0.648 0.571 0.076 1.717 **
W# 3.842 3.492 0.350 6.816 *
S@ 6.786 5.973 0.813 4.703 *
A# 2.405 2.262 0.143 1.936 **
No of firms (N) 22 50
Notes: @--equal variances assumed as F-statistics was significant;
#--equal variances not assumed as F-statistics not significant; *
and ** refer to statistical significance at 1% and 10% levels
respectively.
Source: Computed from Authors' Survey (2010).
Table 5. Export intensity and technological capability regressions,
Garment firms, Myanmar, 2010
OLS: XY
A 0.105 0.192 0.121 0.062
(1.317) (1.954) *** (1.305) (0.739)
FO 0.368
(6.890) *
TC 0.181
(2.463) **
W 0.497
(4.363) *
S 0.217
(6.421) *
C 0.328 -0.012 -1.385 -0.812
(1.793) *** (1.954) ** (-3.355) * (-3.367) *
R2 0.446 0.141 0.268 0.415
F-stat 27.824 * 5.669 * 12.609 * 24.487 *
LL
Tobit: TC
A 0.026 0.062 -0.036
(0.189) (0.408) (-0.257)
FO 0.464
(5.058) *
TC
W 0.548
(2.923) *
S 0.285
(4.355) *
C 1.204 -0.710 -0.283
(3.824) * (-1.046) (-0.700)
R2
F-stat
LL -26.669 * -33.576 * -26.803 *
Note: Figures in parentheses refer to t (OLS) and z (Tobit)
statistics; *, ** and *** refer to statistical significance at 1%,
5% and 10% respectively.
Source: Computed from Authors Survey (2010)
