VERN sub-project

VIETNAMESE T&G FIRMS IN THE GLOBAL VALUE

CHAIN: IF AND HOW VALUE ADDED PAYS OFF?
Dang Nhu Van
Researcher, Center of Analysis and Forecast, Vietnamese Academy of Social Sciences,
477 Nguyen Trai, Thanh Xuan, Hanoi, Vietnam
Phone: +84 4 5522909. Fax: +84 4 5522905
vndang@yahoo.com
Hoang Thanh Huong
Lecturer, National Economics University,
Giai Phong Road, Hanoi, Vietnam
hhuong18@yahoo.com

June 2005

The authors would like to thank IDRC for financial and technical supports to this research.
Also deep gratitude is owed to Remco Oostendorp and John Cockburn for their valuable
advices and comments on methodology and technical issues.

Abstract

Value added creation by upgrading is one of the indications of firms successful competition
while inserting themselves into a commodity value chain. This paper explores the impact of
upgrading efforts by textile and garment firms in Vietnam on the value added they create, and
how that value added benefit the firms, the government, and the workers through the rentsharing process. The findings are that the benefit of upgrading varies between capital and
labor intensive firms. Firms that create more value added are also more profitable. The
benefit to the government is proportional to the value added firms create. And workers
benefit from higher value added through higher wages.

Key words: value chain textile garment

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Table of Content
Table of Content ........................................................................................................................2
Abbreviations.............................................................................................................................3
1. Introduction............................................................................................................................4
2. Vietnam in the global T&G value chain ................................................................................4
2.1. Performance and contribution of T&G industry in Vietnam ..........................................4
2.2. Literature on value chain ................................................................................................6
2.2.1. International literature on value chain .....................................................................7
2.2.2. Literature on global textile & garment value chain .................................................7
2.2.3. Relevant literature on textile garment in Vietnam.................................................10
2.2.4. Research rationale..................................................................................................11
3. Methodology ........................................................................................................................12
4. Quantitative analysis and findings .......................................................................................13
5. Findings from firm interview...............................................................................................16
5.1. Interviewed firms ..........................................................................................................16
5.2. Remarks from firm interviews ......................................................................................19
6. Conclusion ...........................................................................................................................19
Appendix 1. Data Source .........................................................................................................21
Appendix 2: Regression results ...............................................................................................22
Appendix 3: Questions for firm in-depth interview.................................................................27
References................................................................................................................................30

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Abbreviations
ACT: Agreement on Clothing and Textile
AFTA: Association of Southeast Asian Nations Free Trade Area
CMT: Cut-Make-Trim
EU: European Union
FOB: Free on board
GDP: Gross Domestic Products
GSO: General Statistics Office
LDC: Less developed countries
OBM: Original brand-name manufacturing
OEM: Original equipment manufacturing
PWC: PriceWaterhouse - Cooper
R&D: Research & Development
SOE: State-owned enterprise
T&G: Textile and Garment
UK: United Kingdom
UNIDO: United Nations Industrial Development Organization
WTO: World Trade Organization

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1. Introduction
Textile and garment (T&G) industry has been one of the bread winners for Vietnam over the last
15 years in terms of export earnings and job creation. This is so far the most important exportoriented manufacturing industry of Vietnam. However, the world competitive environment is
changing and its is the time to review the adaptability of this industry. The challenges include
loss of price competitiveness due to lower cost countries and being trapped in the low value end
of the global value chain for textile and garment products. When the ATC is fully phased out in
2005, the currently quota-restricted countries, like China, which are very competitive, will be
able to sell more in the developed countries' market. And given China's WTO membership,
Chinese T&G products have access to all WTO member countries. Both these factors would very
likely to squeeze Vietnamese firms' margin, if not completely drives them out of those markets.
Does cheap labor remain the country's comparative advantage in the long run? How to remain
competitive when the country becomes more integrated into the global value chain? These
questions should be asked for all labor intensive industries, including textiles and garments, to
help the country find its dynamic, instead of relying on its static comparative advantage, over
time. As the country moves to another stage of development and the world competition
environment changes, comparative advantages do not remain the same over time. The current
trend is that increasingly more value added accrued to non-production activities in the whole
value chain. Therefore, to break the cycle of barely earning processing fee, the lowest value
activity in the chain, capacity building is necessary in other areas, such as design, marketing,
trademark development, and distribution.
To reflects on the current and potential competitiveness of Vietnamese T&G firms, this paper
will look at the global T&G value chain and see where Vietnamese firms are, and to analyze
firm's data to see what factors likely affect their competitiveness or ability to move up the value
chain. A number of firms are selected for in-depth interview to provide case study and illustrates
firm's performance and response to the competitive environment. The paper is organized as
follows: Section 2 provides an overview on the global T&G value chain and the position of
Vietnamese firms therein; Section 3 describes briefly the methodology of this study; Section 4
deals with quantitative analysis and data; Section 5 looks at specific firms interviewed for the
purpose of this study; and Section 6 concludes the paper.

2. Vietnam in the global T&G value chain

2.1. Performance and contribution of T&G industry in Vietnam
In Vietnam, T&G industry made impressive performance over the past years. The growth rate of
the industry has been high at 10 percent per annum as opposed to the countrys annual GDP
growth rate of 7.6 percent during the 1990s (GSO, 2001). The T&G industry played an important
role in the economy in general and in the manufacturing sector in particular. The share of textiles
and garments in manufacturing output was around 10.5 percent (GSO, 2001). The export
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performance is spectacular as well, especially since the Bilateral Trade Agreement with the
United States came into effect. From 2002, T&G became the second most important export items,
after crude oil. T&G exports reached US$ 2.7 billion in 2002 and were estimated to be around
US$ 3.6 billion in 2003; this makes it account for 18.1 percent of total exports and 27 percent of
non-oil export in 2003 (Table 1). In terms of employment generation, the industries account for
23 percent of manufacturing jobs at the end of 2002 (GSO, 2003). This shows how important this
industry is in the economy, in exports, and in job creation.
Table 1. Vietnam's Export Performance by Key Commodities 2002 and 2003, million $
2002
% of
$
% of
total
million
total
non-oil
16,706
13,436
3,270
19.6%
2,752
16.5%
20.5%
2,023
12.1%
15.1%
1,867
11.2%
13.9%
726
4.3%
5.4%

Total
Total non-oil
Crude oil
Garments and textiles
Aqua Products
Footwear
Rice
Electronics, Computer
Component
492
Wood products
435
Handicraft and fine art items
331
Coffee
322
Rubber
268
Cashew nuts
209
Fruit and Vegetables
201
Electric wire and cable
186
Coal
156
Plastic products
153
Bicycle and Equipment
124
Pepper
107
All kind of Tea
83
Peanuts
51
Source: Ministry of Trade, www.mot.gov.vn

2.9%
2.6%
2.0%
1.9%
1.6%
1.3%
1.2%
1.1%
0.9%
0.9%
0.7%
0.6%
0.5%
0.3%

3.7%
3.2%
2.5%
2.4%
2.0%
1.6%
1.5%
1.4%
1.2%
1.1%
0.9%
0.8%
0.6%
0.4%

2003 (Estimated)
% of
$
% of
total
million
total
non-oil
19,870
12,929
3,777
19.0%
3,600
18.1%
27.8%
2,237
11.3%
17.3%
2,205
11.1%
17.1%
734
3.7%
5.7%
685
560
367
458
395
284
152
290
181
173
155
104
60
48

3.4%
2.8%
1.8%
2.3%
2.0%
1.4%
0.8%
1.5%
0.9%
0.9%
0.8%
0.5%
0.3%
0.2%

5.3%
4.3%
2.8%
3.5%
3.1%
2.2%
1.2%
2.2%
1.4%
1.3%
1.2%
0.8%
0.5%
0.4%

The comparative advantage that has been tapped so far by domestic firms and sought by foreign
investors in T&G industry is cheap labor. Vietnamese firms so far show little capacity in design,
marketing, product development, and especially access to consumers. Therefore, these firms
mainly work as subcontractors for and thereby earn processing fee from larger manufacturers in
the region, who are first tier suppliers to either global traders or retailers (Figure 1).

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Figure 1: Vietnams T&G firms in the global value chain
Design,
Branding,
Marketing,
Distribution,
Product
Development

GLOBAL BUYERS

Consumers

(Retailers)

Sourcing,
Outsourcing,
Placing orders

TRADERS

Cut-Make-Trim or
Cut-Make

Regional
Manufacturers (1st
tier suppliers)

Missing Link

Regional
Office

Vietnamese T&G
firms

2.2. Literature on value chain

There has been some literature on value chain analysis around the world, among which is studies
by Kaplinsky on value chain research (2001), Gereffi on types of value chain and upgrading in
global apparel chain (1999). Dolan et al. on specific country (Kenya) export in the value chain
(1999).
Kaplinsky provided a simple definition of value chain, which includes the full range of activities
which are required to bring a product or service from conception, through the different phases of
production (involving a combination of physical transformation and the input of various
producer services), delivery to final consumers, and final disposal after use (Kaplinsky, 2001).
He also pointed out that in fact, there can be many different value chains linked together through
various actors at different stages. The production per se is only one of a number of value added
links. The primary economic rent in the chain of production are increasingly to be found in the
areas outside the production (Kaplinsky, 2001). Therefore, improving efficiency in production
only is not sufficient to sustain competition and snatch rent in the chain, and cost-based
competition is found to be less important as one move to higher value-added activities in the
chain. A series of other post-production factors affect the producer profit, market share, or even
inclusion or exclusion from the chain.

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Kaplinsky explored different ways that firms and countries can upgrade themselves in the value
chain. He classified the observed upgrading process into four categories:
(i) Process upgrading: increase efficiency of internal processes;
(ii) Product upgrading: introducing new products or improving old products;
(iii) Functional upgrading: increasing value added by changing the mix of activities;
(iv) Chain upgrading: moving to new value chains.
All of these processes are to capture more rent, and thus to benefit more from globalization and
the associated more dispersed division of labor.
2.2.1. International literature on value chain
A study of value chain in vegetables export from Kenya to the United Kingdom was conducted
by Dolan et al.. This paper shows that Kenyan producers received only 14 percent of the final
price of vegetables sold in a UK supermarket (Doland et al., 1999).
Gereffi analyzed value chains and divided them into producer-driven and buyer-driven chains.
According to his definition,
[...] in producer-driven value chains, large, usually transnational, manufacturers play the central
role in coordinating production networks. This kind of value chain is typically found in capitaland technology-intensive industries like automobiles, aircraft, computers, semi-conductors, and
heavy machinery. Buyer-driven value chains, by contrast, are characterized by highly
competitive, locally owned, and globally dispersed production systems. Profits in buyer-driven
chains derive not from scale, volume, and technological advances as in producer-driven chains,
but rather from unique combinations of high-value research, design, sales, marketing and
financial services that allow the retailers, branded marketers and branded manufacturers to act as
strategic brokers in linking overseas factories with evolving product niches in the main consumer
markets. (Gereffi, 1999)
Based on this definition, Gereffi considered the apparel industry as typical buyer-driven value
chain.
2.2.2. Literature on global textile & garment value chain
The textile and garment industry is specifically characterized as a buyer-driven commodity chain,
in which retailers and branded marketers rather than manufacturers play lead roles. Without
owning any manufacturing factory, the retailers and branded marketers coordinate a global
supply chain (Frobel, Heinrichs, and Kreye 1980 ; Gereffi 1994) and capture substantial portions
of the value chain (Craig and Douglas 1997; Krishna, Erzan, and Tan 1994, quoted by Lee).
Each country in the apparel commodity chain has a different mix of resources and capabilities
depending on its developmental stage, and that a particular country's export position in the
apparel commodity chain is determined primarily by available resources and capabilities

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accumulated during the course of industry development (Porter 1998, quoted by Lee). Lead firms
in the buyer-driven commodity chain do not make products. Instead, their core competencies lie
in understanding end-users' preferences, designing products, forming cost-efficient global
sourcing networks, and selling finished products with the right distribution plan (Lee). At the
other end of the apparel commodity chain are less developed countries (LDC). Workers in less
developed countries dye, cut, trim, and sew to manufacture apparel products, following the
specifications given by foreign lead firms in the apparel commodity chain. Because less
developed countries have abundant cheap labor, yet are deficient in capital and technology, they
usually take a labor-intensive position and manufacture ready-made clothing as subcontractors
(Lee). Because a proper understanding of, and quick response to, ever- changing demand
conditions is a critical success factor, lead firms of the apparel commodity chain tend to locate
themselves geographically and culturally close to end consumers. The lead firms of the apparel
commodity chain spend their resources on R&D, marketing, and distribution functions to
develop innovative products and control the distribution system, knowing that sources of more
profitable and sustainable competitive advantages stem from innovative product development,
marketing, and distribution capabilities rather than low cost production. . In doing so, they also
create barriers to entry to ensure their superior profit positions within the transnational value
chain. Few firms or new entries would be able to acquire all those skills and capacity in the short
run to snatch away rent. In this regard, apparel and textiles may as well be capital- and
technology intensive industries particularly because implementing product designing, marketing,
and distributing strategies to create and deliver value to world consumers require substantial
financial and technological resources (Lee).
Detailed analysis on the apparel value chain can be found in Gereffi's various work (Gereffi,
1999; Gereffi and Memedovic, 2003). According to these studies, three different types of
manufacturing are observed in this value chain:
Assembly - a form of subcontracting, in which garment sewing plants are provided with
imported inputs for assembly.
Original Equipment Manufacturing (OEM) - firms make product according to a design
specified by the buyer, and the products are sold under the buyer's brand name.
Original Brand-name Manufacturing (OBM) - an upgrading process from OEM to first the
design and then the sale of own brand products. (Gereffi and Memedovic, 2003).
The upgrading process in the value chain is examined by Gereffi as one that takes place at four
different levels:
(1) within factories upgrading involves moving from cheap to expensive items, from simple to
complex products, and from small to large orders;
(2) within inter-firm enterprise networks upgrading involves moving from mass production of
standardized goods to the flexible production of differentiated merchandise;
(3) within local or national economies upgrading involves moving from simple assembly of
imported inputs to more integrated forms of OEM and OBM, involving a greater use of forward
and backward linkages at the local or national level; and
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(4) within regions upgrading involves shifting from bilateral, asymmetrical, inter-regional
trade flows to a more fully developed intra-regional division of labor incorporating all phases of
the commodity chain from raw material supply, through production, distribution, and
consumption (Gereffi, 1999).
A study on specific clothing sector value chain in EU, with some reference to the global trend in
demand and supply, was done by Baden (2002). Global trends revealed by Baden's study
includes: (i) Prices of clothing are declining as retailers competed for market share; (ii) Cost at
the higher end of the value chain (e.g. design and marketing) are rising, putting pressure on
producers to cut cost at the lower end of the value chain (e.g. basic and core products); (iii)
Manufacturers increasingly become distributors and managers of outward processing trade
operations, producing designs and samples only. Retailers have greater control over the whole
supply chain.
Overall, the basis of competition moved from low labor cost to quick response and capacity for
just-in-time delivery. The lower value added end is also where entry barriers tend to be low and
consequently where cost competition is strongest; and the comparative advantage in higher value
added products usually relates to vertical integration with textiles for some categories (Baden,
2002).
Lee did a study on the relation between a country's position in the apparel commodity chain and
the unit value of their exported products as proxy of profit. Four countries -Hong Kong, South
Korea, Bangladesh, and Italy - that are at different developmental stages and hold varying
positions in the global apparel commodity chain - are compared for the respective unit values of
apparel and textiles exported to the United States. Resources and capabilities that permit a
particular country to take a more profitable position within the apparel commodity chain include
not only labor factors and physical, financial resources, but also relationship-based assets and
marketing-based assets such as brand names (Madhok 1996; Wernerfelt 1989, quoted in Lee).
Countries that possess such resources and capabilities are, therefore, likely to develop advanced
competitive advantages beyond merely offering a low cost product, and can command high
values in the world markets (Lee, year unknown). Lee found that by exporting one square meter
of apparel products, Italy earned $15.91; Hong Kong, $ 5.06; South Korea, $3.91; and
Bangladesh, $2.17. That is, the average import value of "Made-in Italy" apparel is about seven
times that of "Made-in-Bangladesh" apparel, four times "Made-in Korea" apparel, and three
times "Made in-Hong Kong" apparel. The conclusion from the study is that countries exporting
under their own brand names may enjoy the highest profit margins, followed by countries that
engage in full package production without owning brands. In contrast, countries that engage in
mere-assembly production, which exploits low wage labor must utilize mass production of low
value-added apparel to remain profitable. Within the apparel commodity chain, countries that are
capable of designing, marketing, and distributing apparel product to meet ever-changing end
consumers' needs seem to enjoy higher unit values than countries with a production and
manufacturing orientation (Lee).

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The experience of East and Southeast Asia in apparel upgrading is mixed in terms of timing and
speed. The Philippines needed about 40 years to move from cottage based enterprises in the
1950s to a more technology-based exporting garment industry by the 1990s, and still lacked
linkages with the domestic textile industry, and thus had to import 90 percent of its textile
requirement (Antonio et al, year unknown). But Hong Kong firms shifted their production
facilities abroad and moved to design, brand management, and marketing as early as the late
1960s, Taiwanese and Korean firms in the 1980s, due to the rising wage at home and the quota
imposed on their exports to the United States and Europe.
2.2.3. Relevant literature on textile garment in Vietnam
From the analysis in literature on the global textile and garment value chain, it is obvious that
Vietnam's position in the chain is at the low end. The T&G industry of Vietnam is characterized
by mere assembly activities, using imported inputs, and selling under buyer's name, with little
vertical linkages, and competition is solely on low price, given its abundant labor. This pattern is
so far proven beneficial for the country's export-led growth and job creation, but whether it
remains profitable and sustainable in the long run is questionable. Analysis on the situation of
Vietnam's T&G industry can be found in studies by Thoburn et al., Nadvi et al., Goto, Hill,
Pricewaterhouse Cooper (PWC) et al., among others. Most of these studies provide description
and analysis on the current situation of Vietnam's T&G industry and challenges ahead.
A study by PWC et al gives an assessment that for the textile and garment industry in the
medium term the outlook remains favorable, based on growing local and international markets
and garment sourcing networks that target competitive labor cost sources. However, the same
paper warns that increasing attention must be on value creation and retention rather than sales
maximization (PWC et al., 2003). Most analyses point out differences between textile and
garment sectors in terms of performance, factor intensity, competitiveness, import dependence,
applied trade regime, and trade orientation. Textile companies represent the majority of revenues
but are, in total, loss making (PWC et al., 2003). While the textile industry mostly competes with
imports in the domestic market, the garment industry is much more export-oriented and become
the leading manufacturing export industry of the country. According to the 1996 input-output
table, only 11.3 percent of textile total gross output was exported directly, compared to 84
percent in the case of garments. Imports of textiles were the equivalent of 77 percent of gross
output in textiles, and imports of clothing were the equivalent of 21.8 percent of the gross output
of clothing (Thoburn et al, 2003). For garment industry, about 75 percent of its exports are on the
CMT basis (cut-make-trim), which means garment firms make clothes using fabrics supplied by
buyers, following buyer's design and specifications; the remaining 25 percent is on FOB basis,
which means that firms buy fabrics from their own source with own financial resources to make
clothes. This low FOB share in garment export is, as explained by various studies, due to the
poor quality of domestic fabrics and thus most garment buyers choose to soppy or specify the
supply source of imported fabrics.
Study by Nadvi et al. on Vietnam's textile and garment industry in the global value chain
provides a profile of global buyers that Vietnamese T&G firms deal with, thus showing where
Vietnamese firms are in the global value chain. These buyers include leading international

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brands from specialist multiples, department stores, supermarkets, discount and mail order
outlets (Nadvi et al., 2003).
Based on this industry profile, the government intention in investing heavily in textile to expand
its capacity to meet the demand for inputs of the garment industry, thus increasing the local
content of the latter through this backward linkage, is challenged by various studies. Whether
Vietnam should heavily invest in its textile industry to increase the value-added of textile and
garment exports remain a debatable question among government, industry, and research
community. Arguments of the PWC study is that increases in upstream capacity spinning,
weaving, knitting, finishing, and fiber supply - will not in themselves guarantee the uptake of
these capacities by the market. The capacities will only be filled if the market, which is
dominated by foreign buyers with well-developed supply chains, chooses to use the output (PWC
et al., 2003). Goto (2003) also argues that it takes time and tariff protection to develop the textile
industry, while the AFTA and other international commitments of Vietnam for trade
liberalization do not give this industry that opportunity. Furthermore, increasing the domestic
value-added of garment exports has not much to do with developing the local textile industry.
Goto believes that CMT-based export is currently the competitive edge and thus appropriate or
the country, it is also safe as exporters do not have to bear risk in sourcing and distribution.
PWC study focuses on analyzing the industry profile and its biggest company, Vinatex, the state
corporation with about 45 member companies. The study points out that for garments, without
product development and design, the industry will be locked in its continuing niche to supply
C&M or CMT products to a sourcing chain which is mobile and has little loyalty. Another
explanation for the industry being captive to low value end is due to the passive marketing, sales
rather than return maximization; plus not matching product to market demands (PWC et al.,
2003). Due to the lack of design, marketing and brand development capacity, the country
remains a "price taker", mainly produces low value basic products without differentiation.
Though elements on Vietnam's position in the global textile and garment value chain are found
and analyzed by various studies cited above, no attempt is known so far to link between
quantitative and qualitative studies. The question of interest is whether it is the best strategy for
each country at each point in time to move up the value chain, given the cost of doing so and the
benefit gained by different stakeholders. The study of Vietnam's distribution system in textile
and garment industry by Goto concluded that it is not beneficial for Vietnam to move up the
value chain at this point. But the Vietnamese government believes that the country should move
up by investing more in the textile industry to move up the chain that way. This research paper
aims at probing the benefit of Vietnam's moving up the value chain through empirical evidence
and qualitative information obtained from firm interview.
2.2.4. Research rationale
This research therefore intends to fill in these gaps in methodology and in policy analysis. The
effort here is to explore whether firms that move away from CMT-based export, manufacture
higher quality products, employ higher skilled labor, use more domestic (versus imported)
materials, investing in upgrading themselves in the value chain, are more profitable, pay
higher wages to their worker, can create more value added, and pay more taxes to the

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government. The findings of research will therefore be expected to contribute to the
development of this important manufacturing sector, and some key findings could also be valid
for other labor-intensive export-oriented manufacturing industries.

3. Methodology
Based on the productivity and rent-sharing theories, this research tries to examine how
Vietnamese textile and garment firms can become more competitive and how the value added
they create can benefit the country and the firms themselves. In this exercise, we use the survey
data of 150 textile and garment firms for 1999 and 2000 for quantitative analysis (See Appendix
for survey details). We assume that stakeholders in this process include the economy, the firms,
the workers, and the government. We try to see whether firms efforts to become more
competitive, to upgrade themselves in the value chain would result in higher value added,
profitability, higher wages paid to workers, and more taxed paid to the government. In other
words, how the firms position in the value chain benefit the different stakeholders. Based on the
dataset obtained from the multi-purpose T&G firm survey, we select the following proxies of
upgrading for this analysis: doing own design, R&D spending, worker skill intensity, percentage
of workers with high education level, the export share in revenue, the CMT share in total export,
garment as share of total revenue, and the share of domestic raw materials. This data availability
and variables do not allow to distinguish between different types of upgrading that takes place in
the firm. But interview with firms provide more insight on what types of upgrading that firms
might have involved in.
In the first step, we will explore how firms' upgrading will have impact on value added. On the
one hand, more efforts in doing own design, more spending on R&D, employing more skilled
workers, more staff with higher education, and export more mean firms are more upgraded or
take efforts to move up the value chain. On the other hands, larger CMT share in total export
indicates that firms are less upgraded and mostly rely on low value activities. We include the
variable of domestic materials to answer the policy question of whether Vietnam should develop
more upstream industries (e.g. textile) to produce input materials for the downstream industries
(e.g. garment), or it is better to import. The variable of garment share in total revenue aims at
characterizing firms as garment or textile, as many firms in the sample do both activities. We
control for firms different characteristics such as location, ownership, size, and age. If firms'
efforts in upgrading result in higher value added, then obviously they would benefit the country
as the whole. But if the efforts indeed result in higher value-added, but not higher profitability,
then they may not have incentives to do so, and further steps may be needed to study why firms
or the industry are not ready yet to move to higher value added activities for the benefit of firms
and the country as the whole.
Second, we therefore also analyze how the benefit of upgrading is distributed among the
stakeholders, in the forms of higher value added to the economy, more profit to firms, higher
wages to workers, and tax paid to the government. Third, we will examine what kind of
upgrading efforts pays off in terms of value added for all firms, labor intensive firms, and capital
intensive firms through a simulation exercise. And finally, there are costs involved in upgrading,
which may or may not outweigh the benefits, and we need to take that into account in the
analysis.

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Quantitative analysis is however in itself a limitation in explaining factors behind the
competitiveness (or the lack of) of textile and garment industry. Therefore, results from
regression analysis are then brought to interview with selected firms to find out if that is true and
the reasons behind such performance. Firms selected for intensive interviews are all exporting
firms, with the size from 200-500 workers, producing either textiles or garments, or both.

4. Quantitative analysis and findings

Table A1 shows that doing own design, R&D spending, skill intensity, percentage of workers
with high education levels are positively and significantly correlated to value added. Meanwhile,
CMT share is negatively related to value added. Likely, lower CMT share, higher export share,
doing own design, spending more on R&D, employing higher skill and more educated workers
indicate that firms are more upgraded.
However, bivariate correlations may reflect other factors and therefore the observed correlations
between upgrading and value added may be spurious. Therefore, we run regressions of value
added as functions of capital, labor, and proxies of upgrading, with interactions between the
upgrading and size (capital and labor) variables (Table A2). The results show that with
interactions between firms size and the share of garment in its revenue (Regression 1), value
added is strongly and positively correlated with firm size, both capital and labor.
The signs of the interaction terms between garment share and the size variables imply that capital
productivity is lower in firms with a larger garment share, while labor productivity is higher.
This confirms that garment firms are labor intensive and textile firms are capital intensive
industries and that garment production is more appropriate for a labor abundant country.
Next we introduce the proxies for upgrading in the regression to test whether upgrading increases
value added. It was found that none of the upgrading variables was significant if included
additively. However, when interaction variables are added between size and each upgrading
variable (Regression 2), value added is still strongly and positively correlated with capital and
labor size, but the coefficient for labor size is no longer significant (p-value 0.17) . The
relationship between size (both capital and labor) in garment firms and value added still holds.
Interestingly most of the proxies for upgrading are now jointly significant at a significance level
of 5% (based on F-tests). Also notable is that for each proxy for upgrading that the coefficients
on the interaction term with capital and labor have opposite signs, implying that upgrading
makes the production process more or less labor-intensive. In particular, we find that exports,
professional level intensity, R&D, and skill intensity are relatively capital-intensive, while design
is labor-intensive (the proxies for CMT and domestic material share were jointly insignificant at
5% significance level). This implies that the impact of upgrading is greater for capital-intensive
firms (except for design upgrading). But the complementarities between upgrading and capital
also raise the question whether upgrading is the most appropriate strategy for a labor-intensive
country such as Vietnam. Therefore it is important to test whether upgrading is actually
profitable for the firms.
A practical issue is that garment exports of Vietnam to the major markets are subject to quota
from importing countries, and SOEs are claimed to have more favorable access to quota, thus

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VERN sub-project
they may perform differently from the rest. However, a test for SOE dummy variable, with
interaction with their capital and labor size, does not show that it is significant.
In addition, there is also a time lag problem in this cross-section regression. What comes out as
value added today might be a result of investment or upgrading efforts made a few years or many
years back, or the benefit of the fact that firms upgrade today may not show up until years later.
To check whether firms that create more value added are more profitable, we run a regression of
profitability as a function of value added, controlling for firms characteristics (Table A3). The
results indicate that value added is strongly and positively correlated with profitability.
Furthermore it can be seen that firms located in the South are relatively less profitable for the
same level of value added. The implication here is that profitable firms tend to create higher
value added, thus benefit themselves and the country as the whole. The other way around:
firms with higher value added are more profitable. However, given the low R-square the
equation only explains a small part of the relationship..
Next, we want to see how value added benefits the government in the form of value added tax.
The value added tax rate is run against value added, controlling for firms characteristic (Table
A4). The regression shows that none of the variables is significant implying that the value added
tax rate is not affected by firm characteristics. Therefore, the benefit to the government of
increased levels of value added is proportional.
We then try to see how value added benefit workers in the form of higher wages. We regress
hourly wage against value added, controlling for firms and workers characteristics like age,
experience, sex, skill, etc (Table A5). We found that value added is positively and significantly
correlated with wages, regardless of firms age, worker experience, skill level, or sex, except
in private firms. And this relationship is quite robust. This means workers benefit from the
higher value added created by firms where they work. There can be a question about impact of
higher capital intensity on employment. In other words, when firms invest more in capital
equipment and machinary, they may lay off labor or stop hiring more labor, in which case the
laid-off workers and job-seeking workers do not benefit from the firm's upgrading.
To illustrate how value added varies with and without each proxy of upgrading, a simulation is
run for all firms, labor intensive firms, and capital intensive firms (Table 2). For all firms, doing
own design and export are very value adding, but export on CMT basis and using domestic
material bring very little value added. This confirms the regression results. However, the value
adding proxies are not the same for labor intensive firms and capital intensive firms. If the
similar simulation is made for labor intensive firms, doing own design, export, and CMT are
value adding, while spending on R&D, employing more skilled labor, and more professional
staff are not. For capital intensive firms, export, doing own design, and spending on R&D are
highly value adding. Employing professional staff is a little more value adding than without. But
CMT brings very low value added. Using domestic raw materials is always not value adding in
all cases.
This simulation indicates that for labor intensive firms, the effort to upgrade by investing in
R&D, skilled labor, and professional staff is not rewarding in terms of value added, but for
capital intensive firms, it does.

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VERN sub-project
Table 2: Simulation of value added change by proxies of upgrading
Variable
All firms
VA
VA_CMT
VA_design
VA_rdpct
VA_skilpct
VA_matdpct
VA_expsh
VA_propct
Labor intensive firms
VA
VA_CMT
VA_design
VA_rdpct
VA_skilpct
VA_matdpct
VA_expsh
VA_propct
Capital intensive firms
VA
VA_CMT
VA_design
VA_rdpct
VA_skilpct
VA_matdpct
VA_expsh
VA_propct

Observations

Mean

% change

280
280
280
280
280
280
280
280

6232
5864
9503
6827
6236
6223
11521
6301

0%
-6%
52%
10%
0%
0%
85%
1%

89
89
89
89
89
89
89
89

3705
4111
6844
3373
3690
3706
5920
3602

0%
11%
85%
-9%
0%
0%
60%
-3%

121
121
121
121
121
121
121
121

7519
6298
9251
9138
7544
7501
15220
7791

0%
-16%
23%
22%
0%
0%
102%
4%

There is an issue of causality, however, between firms upgrading and the value added they
create or their profitability. More profitable firms are more likely to invest more in R&D, or
afford more upgrading efforts, which in turn would result in higher value added.
Another factor to bear in mind in this analysis is the cost of upgrading, be it capital investment,
human resources, or any other form of investment. This empirical research has found a strong
correlation between profitability and value added. As indicated in Regression 3, Table A2, the
coefficient for capital labor ratio is far less than one. This can be interpreted that a dollar of
investment in capital would result in less than one dollar of value added. This means that it is
costly to upgrade.
However, it is not always easy to upgrade while competing in the global value chain. And for
this particular research, the data was obtained from a survey in 1999-2000, when a number of
firms started their upgrading plans, by investing in new technology, R&D, design, etc. But the
effects of this upgrading may not show up until a few years later. Therefore, findings in this
quantitative analysis may not fully capture the relationship between upgrading and reward in the
forms of value added and profitability. Moreover, empirical evidence needs supplementary

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VERN sub-project
anecdotal evidence from firm interview to explain or challenge some of the findings. In-depth
interview with firms will shed some light on the difficulties faced by firms in moving to higher
value activities to catch more rent.

5. Findings from firm interview

5.1. Interviewed firms
Three T&G firms were interviewed under this study to find out about their position in the value
chain, their efforts (if any) to move to higher value activities, and their readiness for future
competition when the quota to the biggest market is removed for free competition. Questions for
interview are provided in Appendix 3.
Firm A: A joint venture garment company, export 100% on CMT basis
This is a joint venture with 30% of local equity. The company employs 300 workers, an optimal
size for efficiency and profitability purposes, as expressed by managers, after experiencing lower
efficiency due to larger size in the past. One hundred percent of the company's products are made
on CMT basis. Very small fractions of raw materials are sourced domestically (e.g. thread and
zippers), all the remaining are imported. Design, raw materials, and marketing are all provided
by the buyer. The company does not have R&D activities.
The buyer is from Taiwan and the target market is Japan. The company is completely ignorant
about the price at which its product would be sold and the trademark for it in the Japanese market.
The company so far has no plan to move to higher quality and thus higher value-added products.
Higher quality products require investment in technology and equipment, and not necessarily
promise any higher profitability, as viewed by the managers.
When asked about anticipation of potential competition with other garment exporters after the
ATC expires and the lift of quota, the company shows no concern about it. The explanation is it
only targets the Japanese market, which has no quota, and thus the quota removal does not affect
the company. Currently, the company is also allocated with quota to export to the EU market, but
never uses it, therefore sells it to those that need.
The company does not have its own distribution network in Vietnam. And since it is a full CMT
manufacturer, the managers believe that it does not have to develop distribution and marketing
network, and has no plan to do so. The buyer always takes care of this function. The company
did not have any promotion activities in the past year, and in general does not invest in its own
image or trade name. The company may have some promotion and marketing in the future, but
for its laundry part, which targets the local market only, not in the core business or targeting
export market.
The company does not see any competitor in Vietnam that targets the same market. Instead, it
sees more cooperation between local companies in supplying materials to each others at high
time. The company does not anticipate any stronger competition in the future, either.

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VERN sub-project
Firm A case is a complete subcontractor that operates in purely assembly business. None of the
four types of upgrading can be observed. As the buyer takes care of the marketing, design, and
input materials sourcing, the company is completely passive in all of those activities. Based on
the findings from the quantitative analysis, if firms of this type (labor intensive and export
oriented) take effort to upgrade in terms of R&D and design, it would create much higher value
added compared to the complete reliance on buyers for such activities.
Firms B: A state-owned enterprise, producing both textile and garment, export 60 percent on
CMT basis
This company has annual sales of about US$26 million, 77percent of which is from export.
Ninety percent of its export sales is from garment products, and 10percent is from textiles
products like fabrics and yarn. Its garment products are exported to the U.S. and EU., while
textiles are exported to EU and Southeast Asia. Domestic sales are through orders from parent
company. And the company takes this as a secured source of order that makes it less dependent
on the export market.
The company imports about 80percent of its materials to produce for export. Though the
company produces fabrics, it is mainly for domestic market and does not meet the quality
standard required by export garment. In other words, the fabrics the company produces cannot be
used as materials for its own export garment. But the company plans to upgrade its textile quality
by purchasing technology, hiring foreign consultants for technical assistance. The company
expects that this upgrading in technology would potentially increase the profitability of its
garment business, as it will be able to produce fabrics for its own garment production. Currently,
domestic materials for garment production only accounts for 10percent, and are produced by
foreign firms located in Vietnam.
About 60percent of the company's export sales is on CMT basis. The remaining is FOB export.
This is FOB1, as the buyer designates the supplier of fabrics, provides design and marketing, and
the company only earns 7percent of management fee. The company plans to expand FOB export
in the future, since FOB export is more profitable. However, financial risk associated with FOB
will also be higher, as the buyer may not accept the product quality and features. The company
knows where their products would end up, and the price at which they are sold to end consumers.
However, it can do nothing to increase its bargaining power while signing contracts with buyers,
or to increase its margin. The managers are aware of the labor division and the margin for each
actors in the whole commodity chain, e.g. how much for manufacturer, broker, and department
stores, etc. But they do not see much that they can do to influence their own margin.
The company spends about 2 percent of its revenue on R&D activities. Currently, the company
has its market research unit, with about 10 people. However, this unit does not function well on a
professional basis due to restrictions in the accounting regime. According to accounting rules,
there is a ceiling on deductible cost on such things as promotion, research, etc. Therefore, if the
company spends more than the ceiling, the extra cost will not be deducted for tax purposes, and
this prevents the company from developing the marketing function. Moreover, the company
believes it is more of the parent company and the line ministry's responsibility to do research and
marketing.

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VERN sub-project
The company plans to move to more sophisticated and skilled-intensive products like men suit.
To that end, the company will have to invest more in new equipment and technology, recruit
more workers and their train them.
In anticipation of the quota removal from 2005, the company plans to compete in price, explore
other markets, like Japan. There will still be preferential tariff for Vietnamese garment and
textile exports to some countries in 2005.
The company has its own distribution network in Vietnam, and plans to further expand it, since
domestic market also promises high profitability. The company has been conduction many
promotion and marketing programs for many years to boost sales and to learn experience and
business skills.
The company can foresee more competition in the domestic market in the future, as it expects
more foreign and local entries in the coming years.
Firm B case indicates some upgrading efforts. From the information obtained from this interview,
we can observe three types of upgrading: process upgrading (by investing in technology, foreign
expertise), product upgrading (improving old products), and functional upgrading (moving to
export more on FOB basis). The company also anticipated that this upgrading to higher valueadded activities would pay off in terms of profitability. This is consistent with the findings from
our empirical analysis. However, this upgrading is not without cost. The type of cost mentioned
by the company is in financial risk and market risk. This is not captured by our regression.
Furthermore, there are institutional and regulatory restrictions on upgrading. The ceiling on
deductible spending on marketing and R&D mentioned by the company is a barrier to its
upgrading effort, which is not captured by our regression either.
Firm C: A state-owned enterprise that produces mainly textile and recently started producing
some garments.
This company has annual sales of about VND 700 billion, 40 percent of which is from textiles,
and 60 percent from garments. More than 60 percent of its annual sales is from export. The
company imports about 80 percent-90 percent of its materials for producing textiles. The
company exports on FOB basis, mostly through intermediaries to EU, USA, Japan, and Asian
markets. The company sometimes does not know the price at which its products are sold to end
users. The company spends 1 percent of its revenue on R&D annually. The R&D unit is
responsible for doing market research, finding new materials, trial production, and recently
started innovating product designs. These self-designed products represents 20-30 percent
catalogue used in mass production.
To cope with fiercer competition in the markets in the near future, the company is looking for a
chance to cooperate with foreign corporate to penetrate markets and develop its distribution
system. In addition, restructuring of the company will be conducted. More focus will be placed
on improving skills of workers, finishing techniques and design. Besides, the company is
investing in developing new materials which raise values of its products. The company plans to
develop its own distribution system in the domestic market to expand its market share and to be
more responsive to end users need.

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VERN sub-project
From the interview with Firm C, three types of upgrading are observed: process upgrading
(improving workers skill, finishing techniques and design), product upgrading (spending on
R&D, design of new product, developing new materials to increase the product value), functional
upgrading (developing own distribution network). However, all of these efforts are only in the
plan and not materialized yet, so one cannot tell whether they pay off in terms of profitability or
other rewards.
5.2. Remarks from firm interviews
As this research was able to approach SOEs and joint ventures only, the findings are also about
these types of firms only, and may not apply to private or foreign invested firms. Interviews with
firms in the sample show that most firms are operating at the low or very low end of the textile
and garment value chain. Two out of three interviewed firms show efforts of upgrading to move
up the value chain, to higher value-added activities,. One firm shows little concern about
upgrading, as it believes that it is still possible and profitable to do business as usual, and their
client base is still quite secured, and no strong competition pressure to change. Upgrading also
involves risk, which is quite discouraging to firms. The government tax policy is another barrier
to firms upgrading. Firms also seem to be concerned more about price rather than quality
competition, which is sometimes considered as the race to the bottom in the global competition.

6. Conclusion
Findings from quantitative analysis show that depending on firms size, efforts to move up the
value chain, i.e. employing professionals and skilled workers, spending on R&D, pay off in
terms of higher value added. Garment industry is more appropriate for Vietnam as the labor
surplus country. Firms that can create more value chain are also more profitable. More value
added also benefits workers in the form of higher wages. The benefit to the government in the
form of value-added tax payment when firms create more value added is proportional. So when
firms upgrade and become more profitable, they benefit themselves, their workers, and the
country as the whole.
The reward in terms of value added to different upgrading efforts vary between labor and capital
intensive firms. For all firms, export and doing own design are highly value adding. For labor
intensive firms, export on CMT basis is value adding, but spending on R&D is not. For capital
intensive firms, R&D is value adding, but CMT is not. The policy implications from these
findings are that export promotion and investing in own designing capacity for the textile and
garment industries help the country move up the value chain, by moving to higher value-added
activities or products. Export on CMT basis still can benefit the country if done by labor
intensive firms. For capital intensive firms, upgrading by investing in R&D is very rewarding.
The interviews with selected firms, SOEs and joint ventures, show that firms are aware of the
changing competitive environment, but not all of them plan to upgrade themselves, the reason
being the perceived risks involved and lack of competitive pressure to change. Firms in the
sample seem not to see a long term trend in competition or to have a strategy to move from price
competition to quality competition through value-added creation. The global textile and garment
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VERN sub-project
chain is increasingly becoming a place of fierce competition, with new and low cost countries
joining the scene. In this context, price competition is a race to the bottom, while quality and
value-added competition, and efforts to find niche markets, is the race to the top. As reflected in
this research, efforts to upgrade in the value chain pay off. Unfortunately, firms in the sample
seem to be in the race to the bottom, rather than to the top, by sticking to the low value-added,
but secured activities in the short run in the chain.
The global value chain picture and Vietnam's position in there shows that the country and its
firms have a long way to go to upgrade and increase its own margin. It is very important in this
process to make firms aware about their competition strategy, to create and build their own
foothold and image in the picture, rather than having a common strategy of selling cheap by
doing more for less.

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VERN sub-project

Appendix 1. Data Source

The primary data used for the quantitative analysis exercise is based on 150 T&G firms survey
conducted by the Institute of Economics in 2001 under the project Trade Liberalization and
Competitiveness of Selected Manufacturing Industries in Vietnam. The sample represents 27.3
percent of total number of established firms, 54 percent of total labor, and 46.1 percent of total
revenue of Vietnams T&G industries in the sampling frame, which was constructed based on
the census of manufacturing firms in Vietnam carried out by GSO and UNIDO in 1998. Small
firms with less than 50 workers are excluded in the sampling frame. In addition to the firm
interviews, worker interviews also were conducted. Eight workers from each firm in the sample
were interviewed with the worker questionnaire. As a result, the worker dataset includes a
number of socio-economic characteristics indicators of 1200 workers. The quantitative exercise
employs the full dataset by pooling the firm data of two years 199 and 2000, and merging the
firm dataset with the worker one.

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Appendix 2: Regression results

Variable names/abbreviation:
age
(= 2000 - year of establishment)
ageW
Age of workers
CMT
CMT share in total revenue
D_loc
(= 1 if firm based in the South; = 0 if firm based in the North)
D_private
(= 1 if private enterprise)
design
Own design (1: own design, 0: otherwise)
designpdt
Number of products of own design
expsh
Export share in total revenue
Exp
Number of working years (for employees)
Exp2
Exp squared
garsh
Garment share in total revenue
K
Capital
Man
(= 1 if manager)
matdpct
domestic material share
P
Profitability
Pro
(= 1 if profesional qualification)
propct
Professional level intensity (college/university and above/total labors)
rdpct
R&D spending share
Sex
(= 1 if male)
Size (or L)
Labor (# of workers)
Size2
(= 1 for firms with 250-500 workers)
Size3
(= 1 for firms with 500-1000 workers)
Size4
(= 1 for firms with more than 1000 workers)
Skill
(= 1 if skilled worker)
skilpct
Skill Intensity ((skilled labor + professionals + managers)/total labor)
soe
(= 1 if State-owned enterprise)
Tech
(= 1 if workers complete technical/vocational training)
Uni
(= 1 if employees graduate from university)
VA
Value-added

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VERN sub-project

Table A1: Correlation among key variables

Hourly
wage
Hourly
wage
VA
size
K
CMT
design
desingpdt
rdpct
skilpct
matdpct
expsh
propct
P/L
P/K

VA

size

CMT

design

designpdt

rdpct

skilpct matdpct expsh

propct

P/L

P/K

1.000
0.098
(0.001)
0.084
(0.004)
0.090
(0.002)
-0.021
(0.463)
-0.061
(0.036)
0.087
(0.003)
-0.066
(0.023)
-0.121
(0.000)
-0.053
(0.066)
0.071
(0.014)
0.031
(0.288)
0.040
(0.169)
0.020
(0.493)

1.000
0.645
(0.000)
0.687
(0.000)
-0.268
(0.000)
0.237
(0.000)
0.057
(0.327)
0.071
(0.222)
0.072
(0.212)
-0.112
(0.054)
-0.207
(0.000)
0.263
(0.000)
0.647
(0.000)
0.347
(0.000)

1.000
0.688
(0.000)
-0.193
(0.001)
0.200
0.001
0.036
(0.534)
0.054
(0.348)
0.139
(0.016)
-0.107
(0.065)
-0.132
(0.022)
0.036
(0.535)
0.016
(0.780)
-0.024
(0.681)

1.000
-0.371
(0.000)
0.185
(0.001)
0.045
(0.439)
-0.020
(0.732)
0.069
(0.234)
-0.140
(0.015)
-0.304
(0.000)
0.141
(0.014)
0.253
(0.000)
0.033
(0.566)

1.000
-0.450
(0.000)
-0.152
(0.008)
0.059
(0.312)
-0.029
(0.622)
0.133
(0.021)
0.432
(0.000)
-0.256
(0.000)
-0.189
(0.001)
-0.027
(0.646)

1.000
0.123
(0.034)
0.226
(0.000)
0.231
(0.000)
0.074
(0.204)
-0.235
(0.000)
0.292
(0.000)
0.149
(0.010)
0.158
(0.006)

1.000
-0.031
(0.593)
-0.088
(0.129)
-0.046
(0.423)
0.024
(0.684)
-0.010
(0.865)
0.002
(0.968)
0.003
(0.965)

1.000
0.109
(0.059)
0.059
(0.309)
0.009
(0.883)
0.044
(0.447)
0.102
(0.079)
0.096
(0.097)

1.000
0.101
(0.080)
-0.050
(0.388)
0.171
(0.003)
-0.010
(0.861)
0.065
(0.263)

1.000
0.114
(0.048)
0.041
(0.483)
-0.088
(0.128)
-0.021
(0.714)

1.000
-0.249 1.000
(0.000)
-0.188 0.350 1.000
(0.001) (0.000)
-0.006 0.127 0.460
(0.915) (0.029) (0.000)

1.000

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Table A2: VA = f(upgrading, K, size, interaction)

(1)
lnVA

(2)
lnVA

0.536
(0.000)***
0.451
(0.006)***
-0.241
(0.056)*
0.478
(0.018)**
-0.748
(0.454)

0.377
(0.000)***
0.325
(0.171)
-0.225
(0.080)*
0.612
(0.007)***
-1.859
(0.133)
-0.302
(0.008)***
0.130
(0.333)
0.034
(0.015)**
0.151
(0.003)***
0.004
(0.006)***
-0.156
(0.364)
-0.001
(0.237)
0.649
(0.001)***
-0.188
(0.527)
-0.044
(0.245)
-0.171
(0.000)***
-0.003
(0.168)
0.202
(0.343)
0.001
(0.579)
0.089
(0.938)
-1.229
(0.157)
-0.243
(0.386)
-0.016
(0.138)
0.005
(0.577)

K/L
lnK
lnsize
lnKgarsh
lnsizegarsh
garsh
lnKdesign
lnKexpsh
lnKpropct
lnKrdpct
lnKskilpct
lnKCMT
lnKmatdpct
lnsizedesign
lnsizeexpsh
lnsizepropct
lnsizerdpct
lnsizeskilpct
lnsizeCMT
lnsizematdpct
CMT
design
rdpct
skilpct
matdpct

(3)
lnVA
-0.003
(0.052)*
0.524
(0.000)***
0.102
(0.719)
-0.227
(0.107)
0.683
(0.006)***
-2.286
(0.059)*
-0.308
(0.005)***
0.149
(0.240)
0.040
(0.005)***
0.145
(0.004)***
0.004
(0.004)***
-0.261
(0.168)
-0.002
(0.096)*
0.645
(0.000)***
-0.196
(0.518)
-0.054
(0.151)
-0.172
(0.000)***
-0.003
(0.189)
0.297
(0.207)
0.002
(0.269)
0.394
(0.732)
-1.174
(0.160)
-0.180
(0.524)
-0.017
(0.102)
0.003
(0.683)

24

VERN sub-project
expsh
propct
Constant
Observations
R-squared

1.017
(0.201)
280
0.789

0.623
(0.691)
-0.031
(0.818)
2.831
(0.019)**
280
0.846

0.471
(0.768)
-0.025
(0.849)
3.038
(0.015)**
280
0.849

Robust p values in parentheses

significant at 10%; ** significant at 5%; *** significant at 1%

Table A3: P/K = f(Va, control variables)

VA
D_loc
age
soe
D_private
Constant
Observations
R-squared
Robust p values in parentheses

PCAP
0.00000676
(0.001)***
-0.1871609
(0.058)*
-0.0042043
(0.297)
-0.0210687
(0.850)
0.0150867
(0.824)
0.2225299
(0.014)**
299
0.145

* significant at 10%; ** significant at 5%; *** significant at 1%

Table A4: VAT = f (VA, control variables)

VA
D_loc
Age
SOE
D_private
Constant
Observations
R-squared

VAT
0.0000000407
(0.891)
-0.0310142
(0.271)
0.000963
(0.298)
-0.0225384
(0.391)
-0.0310786
(0.363)
0.0177901
(0.589)
299
0.0107

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VERN sub-project

Table A5: Wage = f ( VA, control variable)

VA
D_loc
soe
D_private
age
tech
uni
exp
exp2
sex
man
pro
skill
Constant
Observations
R-squared
Robust p values in parentheses

lhwage
0.00000275
(0.076)*
0.5834359
(0.000)***
-0.0915216
(0.500)
-0.1797377
(0.096)*
-0.0049105
(0.281)
0.1874976
(0.003)***
0.391107
(0.000)***
0.0248151
(0.099)*
-0.0010286
(0.052)*
0.1133345
(0.000)***
0.5013572
(0.000)***
0.2585856
(0.000)***
0.1972534
(0.000)***
0.8327464
(0.000)***
1187
0.411

* significant at 10%; ** significant at 5%; *** significant at 1

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VERN sub-project

Appendix 3: Questions for firm in-depth interview

QUESTIONNAIRE FOR FIRM INTERVIEW ABOUT THEIR POSITION IN AND EFFORTS TO
MOVE UP THE VALUE CHAIN
Purpose of the study:
The T&G industry of Vietnam currently exports heavily on the CMT basis, taking cheap labor as the
major comparative advantage. This model is proven beneficial so far for the country's economic
development and job creation. However, while comparing Vietnam and other T&G exporting
countries, the export pattern of Vietnam is at the low end of the value chain, focusing mainly on low
value-added activities. As the international environment will become more competitive after 2005
when T&G quota will be removed according to the Agreement on Textile and Clothing, Vietnam will
face competitive of currently quota restricted countries like China. Further, in the value chain today,
the biggest value added and thus profit are not generated in the production stage, but in market
information, design, trademark, and distribution. Most Vietnamese T&G manufacturers are weak at
these skills.
Therefore, the purpose of this study is to explore whether Vietnam can upgrade in the global T&G
value chain, to move to compete in knowledge, technology, and new comparative advantages, instead
of solely relying on cheap labor and low value products with little innovation and profit. Firms,
researchers, and the government should be aware of this issue to find way to improve the
competitiveness of the industry and the country as the whole.
Questions for qualitative information:
1. Does your firm have the demand for higher skilled workers? Why? And how skilled workers
or the lack thereof affect the firm's profitability?
2. What is the share of imported input materials in total firm's inputs? If domestic materials are
available with equivalent quality and price, does firm choose to use them instead of
importing? And how does that affect firm's performance?
3. What are the types of domestic materials that firm uses for inputs?
4. How much (%) in total cost of firm is spent on R&D, marke research, marketing, design, new
product development, and quality improvement? How does this spending benefit the firm?
5. Is wage/bonus paid on the basis of firm's export performance? How does export-based bonus
vary between levels of skill and education?
6. How much ( percent) of CMT in firm's total export revenue? Does firm have any strategic
plan to increase the FOB-based export (FOB1, 2, 3), or direct export? Does increase in FOB
export benefit firm? Is there any barrier to firm's moving to FOB export (e.g. financial and
credit risk, sourcing for materials, export market, et.)?
7. Does firm have plan to move to produce higher value/quality products? If yes, what kind of
investment is needed (human resources, machinery, technology, capital)? Does this promise
higher profitability?
8. While exporting on CMT basis or through intermediaries, does firm know where its products
would end up, in which market and which segment? Does firm know about the final selling
price to end consumers (thus knowing how much it get in the total final price)?

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VERN sub-project
9. Does firm have any plan to cope with the removal of T&G quota under the ATC by 2005,
when it has to compete in third market with the now quota-restricted exporting countries?
10. Does firm have its own distribution network (showroom, exclusive distributors, outlets) in
Vietnam? If yes, move to question 13.
11. Why firm does not develop its own distribution network?
Most important reason:
Second most important reason:
Third most important reason:
Others:
12. Does firm have plan to develop own distribution network in
one year:
5 years:
13. The reason why firm develops (or not develop) its own distribution network?
Most important reason:
Second most important reason:
Third most important reason:
Others:
14. During the lass year (2003-2004) did firm have any marketing or trade promotion activity?
Yes........... No..............
If no, move to question 16
If yes, list the major activities
................................................................................................................................
15. How does firm benefit from the promotion (please elaborate in as much details as possible)
16. In the near future, does firm plan to do marketing and trade promotion?
Yes........... No..............
Reason:........................................
17. How many competitors does firm have in the Vietnamese market (for its 3 most important
products)?
18. What measures does firm apply to cope with these competitors?

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VERN sub-project
19. In your view, the number of major competitors next year in Vietnam (for its 3 most important
products) will:
Increase (by what level).........................
The same.................................
Decrease..................................

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VERN sub-project

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