By: Janina Mae Almirez
Industrial Analysis
International Master of Business Administration
Chung Yuan Christian University
November 15, 2012

ABSTRACT

The rise of globalization has shifted the manufacturers of textile and apparel to many different parts of the world in search for cheaper labor and maximization of profits. Trade liberalization also means that the world can be your market, and that everyone can be your competitor. We examine the current state of the Philippine textile industry in this context, and the role that technology plays in an industry that is struggling to survive in the face of stifling competition. The Philippines textile industry has suffered steady decline in the past several decades despite starting out strong in its early stages. This study aims to explore the potential for growth of the Philippine’s textile industry given a boost in more advanced technology and innovation. The author focuses on technology because this is the one thing that other countries have already adopted, and with which the Philippines has still yet to fully embrace, partly due to lack of funding and government support. This study will look at the Philippine textile industry’s production output from the year 2000-2010, and aims to establish a relationship between the production volume and the number of patents awarded to innovators within the Philippines, which will be used as a measure of the country’s technological advancement. This research used regression analysis and utilized the Auto Correlation and Ordinary Least Squares Method. The findings show that the patents data may not be a reliable measure of technological advancement, as the results did not support the theoretical framework that production is positively correlated to technological input. The lack of statistical evidence supporting the expected positive relationship between these variables may also be due to the prevalence of other more significant factors including trade policies, government support or lack thereof, and market forces both from within the country and the global market. If this dying industry is to be resuscitated, it is important to still consider boosting technology through research and development, and importation of machineries and technological expertise which will lead to higher production capabilities.

KEYWORDS: Philippines, textile industry, garments, apparel, technology, innovation, synthetic fiber, patents, fabric technology

INTRODUCTION

The textile industry is an age-old industry which makes up an integral part of any economy, whether it is being produced locally or being imported, not only because of its economic relevance, but also because of its social significance in providing one of the basic needs of society, that is, clothing. This is as important to our society as providing food and shelter. The textile industry also plays a vital role in most country’s journey towards industrialization. It is widely known that the Industrial Revolution in Europe, North America, and Japan was made possible by the rise of several key industries, the first of which is the textile industry. Other less developed countries wanting to follow in the footsteps of these industrialized nations know that giving importance to essential industries such as this could become a launching pad for their own economic growth. Due to its labor-intensive nature, textile and apparel firms from developed countries like Europe and North America has transferred its operations to less-developed countries in Southeast Asia in pursuit of cheaper labor markets. Southeast Asian countries have already begun to benefit from the globalization of the world’s textile and garments industry, making them the recipient of outsourced job opportunities encouraged by their cheap wages. One would come to expect that the Philippines has a very strategic position in the advent of globalization as it is in the heart of Southeast Asia, has rich natural resources and has a young and educated labor force. However, for the past several decades, the Philippine textile industry found itself struggling to survive and remain relevant, facing tough competition from its neighboring countries which are able to offer much cheaper wages and are better equipped with advanced technology. There is no question that the Philippines cannot lower wages in order to compete because it will put further strain on the labor force who is already struggling to begin with. If the country cannot compete on this front, then it should explore other areas on which it could gain a competitive advantage.

LITERATURE REVIEW

Scope of Textile Industry Defined:

“The whole range of textile activities covers (1) fiber production, both natural and man-made; and (2) yarn, fabric, garment and made up textile manufacture. As usually defined, the textile industry comprises (1) the primary processing sector -spinning, twisting, weaving, knitting, dyeing and finishing; and (2) the secondary processing sector - garment and made-up textile goods manufacturing.”

Growth defined:

Sanchez (1990) measured the growth of the textile industry in Thailand and the Philippines by calculating the growth rate of export-import ratio, also called the International Competing Power Index or ICPI, because the industry is considered healthy and thriving if export volume exceed its imports. The said paper also emphasized Total Factor Productivity as a measure of growth.

Total-factor productivity is defined as “the ratio of net output to the sum of associated labor and capital (factor) inputs. By ‘net output’ we mean total output minus intermediate goods and services purchased. Notice that the denominator of this ration is made up of only the labor and capital input factors.”

This study differs in that growth of the textile industry is measured by production output by volume, because Sanchez (1990) has already shown that exports in the Philippines is predictably lower than the imports due lack of competing power and its focus on meeting domestic demand. Also the time period covered by Sanchez (1990) is from 1975-1984, while this study will cover the time period 2000-2010.

Sanchez (1990) considers the garments/apparel industry separate from textile industry in the Philippine setting because, as she claims, the latter deserves special treatment since fabric used in making ready-made apparel is often imported, and as such is a class of its own. She further describes that Thailand considers textile and garments to belong in the same industry. In order to achieve uniformity, said study has considered data only on the textile industry of both countries. This study, however, will consider the textile and garments industry to belong in the same category due to the fact that not all garments are made with imported fabric, and that it will be difficult to find exact data on the percentage of garments produced using local fabric, and that using imported textile. This paper will use the production function and will measure production output by volume as an indicator of growth.

Sanchez (1990) describes the difference of the Philippine textile industry’s development process from that of Thailand’s. The author points out that, though the Philippines was a pioneer in the industry, starting as early as 1905, and Thailand was a latecomer, arriving only in the 1950s, the former eventually lagged behind Thailand’s progress because of the lack of new technology and innovation which was the main driving force of Thailand’s growth, propelling it to be a prominent exporter of textile goods. In Thailand’s case, the technology came from Japanese investors who brought their innovation and expertise from Japan’s superior textile industry. Whereas in the Philippine setting, there were no foreign direct investments which could have brought in new technology or expertise from expatriate managers.

Chiu (2007) examines the development of Taiwan’s textile industry after World War 2, and found out that it has achieved prominence in the textile industry because of concerted efforts from the national government and its private sector. The national government gave tremendous support to its textile industry and passed continuously evolving legislation designed to give a boost to the industry in its different development stages. Textile producers were able to import weaving machines and materials from more advanced countries. In addition to this, technology and innovation were developed from within the country which accelerated its growth. It no longer had to deal with issues such as shortage of raw materials because it became the world leader in synthetic fiber production. Because the industry of textile and garments is such a labor-intensive industry, many firms eventually found it more profitable to transfer to countries which offer cheaper wages and has led them to transfer to China and other Southeast Asian countries, prompting the local Taiwan textile industry to focus on innovation-intensive instead of labor-intensive textiles. This is the reason that Taiwan is considered the world leader in synthetic fiber production.

The study made by Chiu (2007) supports this study’s stand that technological advancement in the textile industry does not necessarily have to come from foreign direct investments. It can be supported by the government through passing more favorable policies and backed by private firms through investments in research and development.

METHODOLOGY

Sampling/Data Collection Methods

The data collected for this study is from the Philippine National Statistics Office. The variable chosen to represent the growth of the country’s textile industry is the production volume of the textiles and apparel from the year 2000-2011. The data chosen to represent the technolo-gical advancement of the country is in the patents filing of its residents from the same time period, for anything related to textile or apparel.

RESULTS

According to the production function used in the field of economics, production output is a linear function of its input, demonstrated by the following:

We use the following formula in our regression analysis:

Y = α + βX

Where Y = Production Output (by quantity) of Textiles and/or Garments X = Number of Patents filed

Statement of Hypotheses:
H0: There is no correlation between the quantity of textiles/garments produced and the number of patents filed.
H1: There is a positive relationship between the quantity of textiles/garments produced and the number of patents filed.
This one-tailed test hypothesis was tested at a 10% significance level (i.e. α = 10%)

Regression Results

Model 1: OLS, using observations 2000-2011 (T = 12) | Dependent variable: TEXTILE | | Coefficient | p-value | const | 90.1348 | <0.00001 | PATENTS | -1.45692 | 0.17903 |

Model 2: OLS, using observations 2000-2011 (T = 12) | Dependent variable: Wearing_Apparel | | Coefficient | p-value | const | 61.4114 | 0.00007 | PATENTS | -1.29899 | 0.20227 |

Model 3: OLS, using observations 2000-2011 (T = 12) | Dependent variable: Combined | | Coefficient | p-value | const | 151.546 | <0.00001 | PATENTS | -2.75591 | 0.12504 |

Model 4: Cochrane-Orcutt, using observations 2001-2011 (T = 11) | Dependent variable: TEXTILE | | Coefficient | p-value | const | 60.6557 | 0.20606 | PATENTS | -0.183017 | 0.75356 |

Model 5: Hildreth-Lu, using observations 2001-2011 (T = 11) | Dependent variable: Combined | | Coefficient | p-value | const | -32.1025 | 0.79477 | PATENTS | -0.0577886 | 0.93751 |

Model 6: Prais-Winsten, using observations 2000-2011 (T = 12) | Dependent variable: Combined | | Coefficient | p-value | const | 134.533 | 0.00755 | PATENTS | -0.390595 | 0.62709 | | | | | | |
The regression results show that the p-value is greater than α = 10%, thus we do not reject the null hypothesis.

DISCUSSION

Our findings show that there is not enough evidence to infer that there is correlation between textile/garment production and the number of patents filed. A possible reason for this is that the patents data may not be an accurate measure of technological advancement in the textile industry, as there were patents filed related to clothing design or pattern that does not necessarily lead to more efficient production. An example of this would be a patent for the design of police uniforms, and design pattern filed by a dressmaking school. These filings were intended to protect the intellectual property of the design of the police uniforms, but do not translate to a better utilization of production inputs or higher productivity.
Another possible explanation that may be considered for these results is the presence of other market factors that have a significantly greater influence on the textile industry, overshadowing the impact of technological progress. One major factor could be the ubiquity of cheap substitutes that flood the market, proving to be devastating to the local industry. These goods are second-hand, branded clothing from industrialized countries going into the Philippines as donations from the Salvation Army, hence it is free, only to be sold at prices that are dirt cheap, so that even people who can afford to buy brand new apparel from legitimate shops find it hard resisting these cheap but branded clothes. Technically those goods are smuggled because the government does not get taxes from them. There is no data indicating the volume of these donations as of the moment, but it is very apparent that the presence of these cheap substitutes has drastically changed the shopping behavior not only of the poor, but also of middle class consumers.

Recommendations for Future Research:
It is suggested for future studies to find another means to measure technological advancement of the textile industry. Also, consider measuring the relationship between the volume of the cheap substitutes and production volume of the textile industry.