Growing against the odds: government agency and strategic recoupling as sources of competitiveness in the garment industry of the Pearl River Delta

Despite pressures of rising production costs, China's garment industry has recently displayed continuous growth. We argue that this persisting strength is the result of 'strategic recoupling' through which former low-end exporters forge
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  Cambridge Journal of Regions, Economy and Society doi:10.1093/cjres/rsv020  © The Author 2015. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. For permissions, please email: Growing against the odds: government agency and strategic recoupling as sources of competitiveness in the garment industry of the Pearl River Delta Florian Butollo Department of Labour, Industrial and Economic Sociology, University of Jena, Carl-Zeiß-Str. 3, 07743 Jena, Germany,  Received on November 26, 2014; accepted on June 10, 2015 Despite pressures of rising production costs, China’s garment industry has recently dis-played continuous growth. We argue that this persisting strength is the result of ‘strategic recoupling’ through which former low-end exporters forge new links to the domestic mar-ket or supply higher value-added products to export markets while relocating parts of their operations to regions with lower production costs. Drawing on empirical data from clusters in the Pearl River Delta (PRD), it is analysed how local governments can act as agents in such processes. This is seen as one source of the ongoing attractiveness of the PRD as a hub for the garment industry. Keywords:  industrial upgrading, China, economic development, domestic market, innovation, developmental state  JEL Classifications:  O3, O25, O38, O53 Introduction Driven by profound shortages of labour, land and other resources, frequent labour unrest and government attempts to shift the economic growth model towards domestic consumption, production costs in China have been soaring in recent years. These pressures are particularly pronounced in the Pearl River Delta (PRD), a region that exemplifies China’s development path of export-driven mass assembly based on the widespread exploitation of migrant labour (Yang, 2012).Due to these headwinds, some commenta-tors voiced the expectation that labour-inten-sive industries such as the garment industry are about to decline in China in general and in the PRD in particular, as global buyers prefer sup-pliers in regions with cheaper production costs. A report by McKinsey on garment sourcing, for instance, stated that “[w]hile China is starting to lose its attractiveness […], the sourcing caravan is moving on to the next hot spot” (McKinsey & Company, 2011). Such observations do have a material justification as many low-cost pro-ducers have closed or upgraded their low-end operations and set up factories in regions with cheaper costs overseas or in the Chinese interior (Zhu and Pickles, 2013). However, such reloca-tion processes are much more complex than the idea of a uniform ‘sourcing caravan’ implies. Cambridge Journal of Regions, Economy and Society Advance Access published July 14, 2015   a  t  T  UL B J   e n a  on J   ul   y1  5  ,2  0 1  5 h  t   t   p :  /   /   c  j  r  e  s  . oxf   or  d  j   o ur n a l   s  . or  g /  D o wnl   o a  d  e  d f  r  om   Page 2 of 16 Butollo What is more, textile and garment production in China and in the PRD has been remarkably resilient despite mounting pressures. In order to achieve a more nuanced understanding of the current processes of restructuring, it is nec-essary to account for advantages arising from the local embeddedness of firms in China, i.e. the support of local governments, low transac-tion costs in industry clusters and access to the domestic market, which offset the disadvan-tages of rising costs.Driven by the economic and political envi-ronment, China currently acts as a laboratory for diverse industrial strategies, ranging from spatial reconfiguration to an overhaul of the methods and models of production to a change in target markets (Lüthje et al., 2013, Zhu  and Pickles, 2013, Yang, 2014). This investiga- tion provides additional empirical evidence from two garment clusters in the PRD region which demonstrate that the distinct ‘varieties of relocation’ (Zhu and He, 2013) of firms are shaped by their local embeddedness. In con-trast to previous studies on industrial change in the PRD (Yang, 2014), it is shown how local governments do not obstruct a strategic reori-entation away from export processing produc-tion, but, on the contrary, are instrumental in turning local cluster advantages into assets for industrial upgrading, resulting in a geographi-cal reorientation of production and sales. By highlighting how assets of the past can consti-tute competitive advantages in the future, this study draws attention to often overlooked fac-tors that increase the attractiveness of the PRD as a hub for garment production in spite of the mentioned headwinds.Our contribution is organised as follows. In the next section, we develop a theoretical framework and explain our research methodol-ogy, drawing on recent insights from theoretical discussions about industrial upgrading and ‘stra-tegic coupling’ in global production networks (GPNs) and on regional studies of industrial transformation in the PRD. Drawing on sec-ondary data, the subsequent section provides a brief overview of the post-crisis development of the Chinese textile and garment industry. It indicates a resilience of the Chinese industry and provides aggregate data on the growth of the domestic market which has come to replace exports as the main driver of growth. The fol-lowing section contains a detailed discussion of the recent transformations at enterprises in two garment clusters in the PRD. Finally, we discuss and summarise the results of the empirical investigation with view to their theoretical con-tribution. We argue that the persistent strength of the Chinese industry is rooted in its ability to achieve a strategic recoupling of regional assets with demand for sophisticated supply prod-ucts in GPNs and/or finished products on the domestic market. Chinese enterprises are in a beneficial position to succeed in such processes of recoupling because they can draw on advan-tages derived from their historical regional embeddedness which at the same time consti-tute a path dependency of their trajectories. Yet rather than obstructing industrial transforma-tion, local governments can play a proactive role in transforming industry clusters. Theoretical vantage points: industrial transformation and local embeddedness The theoretical innovation of various strands of production chain literature (cf. Bair, 2009) has paved the way for a refined understanding of globalisation in general and the prospects for firms in developing countries in particular. As a result, attention has shifted from a state-centric perspective to the question of how firms in developing countries can acquire capabilities through their involvement in export-oriented production networks. Industrial upgrading, a term with which Gereffi (2005, 171) defines “the process by which economic actors—nations, firms, and workers—move from low-value to relatively high-value activities in GPNs”, hence is primarily understood as a form of knowl-edge transfer between lead firms and suppliers  a  t  T  UL B J   e n a  on J   ul   y1  5  ,2  0 1  5 h  t   t   p :  /   /   c  j  r  e  s  . oxf   or  d  j   o ur n a l   s  . or  g /  D o wnl   o a  d  e  d f  r  om   Page 3 of 16 Growing against the odds that are acting first and foremost as exporters (cf. Navas-Alemán, 2011, 1389). Thereby, the GVC model was deliberately constructed as a mid-range theory focusing on inter-firm link-ages while omitting scrutiny of ‘external vari-ables’ such as the involved macroeconomic patterns of accumulation (cf. Bair, 2005; Selwyn,  2013), institutional factors affecting enterprise development, such as local state apparatuses or industrial clusters (Bair, 2005; Henderson  et al., 2002; Herrigel and Zeitlin, 2010), and the nature of specific ‘regimes of production’ (i.e. the combination of production technology, employment patterns and forms of workforce control, cf. Lüthje et al., 2013) in different indus-tries. Furthermore, industrial upgrading was understood as a more or less sequential process of stages (in the garment industry from basic ‘cut, make and trim’ (CMT) production mod-els towards more sophisticated srcinal equip-ment manufacturing (OEM) or srcinal design manufacturing (ODM) models and, finally, ‘own brand manufacturing’ (OBM) within pro-duction networks dominated by lead firms in advanced industrial countries (cf. Gereffi, 2005).While GVC theory has enhanced our under-standing of supply chain governance and inter-firm linkages, it provides an insufficient framework for understanding the complex pro-cesses of industrial upgrading and geographical restructuring in the Chinese garment industry, precisely because they occur in a highly path-dependent way reflecting their local embedded-ness. In order to understand transformations of industrial regions, it is therefore necessary to refer to approaches that account for the meaning of economic assets and institutional settings within a specific regional context—a perspective that is particularly relevant to the case of China with its highly distinctive indus-trial structure whose ‘regimes of production’ are deeply shaped by the institutional context (Lüthje et al., 2013; McNally, 2013). The notion of ‘strategic coupling’, brought forward by scholars who in particular have analysed industrial transformation in East Asia (Coe et al., 2004; Yeung, 2009; Yang,  2012), offers such a perspective. In very general terms, strategic coupling refers to the linkage of regional assets (technology, organisation, labour supply, territory, etc.) with needs of firms in GPNs, a process which is often “enhanced and exploited through particular sets and practices of ‘regional’ institutions” (Coe et al., 2004, 469). From this perspective, the export-oriented model of industrialisation in the PRD can be conceived as the outcome of “a ‘strate-gic coupling’ process of regional assets, such as cheap labour and land, geographical proxim-ity and the strategic needs of GPNs” mediated by the specific institutional framework of the export-processing regime (Yang, 2014, 132). As this development path has reached its limits, a transformation would have to be based on a strategy of ‘recoupling’ the regional assets of the PRD with different markets. Unlike Yang, who equates recoupling with the task of gaining access to the domestic market (ibid.), we depart from a broader understanding of recoupling processes that can be directed at the domestic market, but also at certain market segments within GPN, in particular higher quality seg-ments that were not addressed by companies operating under low-tech, labour-intensive regimes of production. 1 From this angle, the sweeping changes affect-ing China’s garment industry can be interpreted as varieties of recoupling, i.e. as efforts to link regional assets to new markets or, conversely, to link markets to new regional assets by a spatial reconfiguration of production. Recent analyses of the garment sector point to the following modifications (cf. Zhu and Pickles, 2013; Lüthje  et al., 2013, 267–8; Zhu and He, 2013; HKTDC  Research, 2011):- A variety of industrial upgrading strategies through improvements in product quality or production processes (automation or lean production, for instance), a diversifi-cation or specialisation of functions, and improvements in management capabilities.   a  t  T  UL B J   e n a  on J   ul   y1  5  ,2  0 1  5 h  t   t   p :  /   /   c  j  r  e  s  . oxf   or  d  j   o ur n a l   s  . or  g /  D o wnl   o a  d  e  d f  r  om   Page 4 of 16 Butollo - A variety of strategies promoting a reloca-tion of operations towards less developed areas in coastal regions or to the Chinese interior. Often this is not implemented as a full-scale relocation, but as a partial reloca-tion or expansion of assets. 2 - The emergence of Chinese multinationals that place investments overseas regions with cheaper labour costs.- The emergence of Chinese fashion brands that sell their products on the domestic market.Such efforts of garment enterprises to gain competitiveness and to overcome the limita-tions of the old resource-intensive low-tech growth model are supported by government on the central and the provincial level. However, it is often doubted how far such a transforma-tion is supported by local governments at the sub-provincial level. After all, they co-evolved with and benefitted from the export-processing model during the past decades. What is more, they continue to benefit from processing fees earned by exporters (whereas provincial and national government entities benefit from tax earnings from firms that are not limited to export processing). Hence, the assumption that the prevalent institutional settings need to be seen as “obstacles for the on-going restructur-ing, particularly the market reorientation from export to domestic sale” (Yang, 2014, 143). While we do not doubt that local government institutions under certain circumstances may hamper economic development in such a way, our study starts from the contrary assumption that local governments which are historically tied to the export production model can act as engines of, rather than fetters for, industrial transformation. The advantages of industrial clusters in the PRD have been acknowledged in a number of recent studies (Zeng, 2010; di  Tommaso et al., 2012; Gereffi, 2009). Rather than preserving the established economic rela-tions, ‘local developmental states’ can just as well benefit from cluster advantages to pursue policies of industrial transformation, i.e. to make the historically evolved industry struc-ture sustainable.Crucially, this task is linked to the chal-lenge to redirect growth toward the Chinese domestic market. As several scholars observe, the quantitative growth of demand in emerg-ing markets thoroughly transforms GPN (Gereffi, 2014; Cattaneo et al., 2010). In par- ticular, some authors acknowledge that local companies have been able to benefit from a rapidly expanding domestic market in coun-tries with a large population, such as China, Brazil or Indonesia. Domestic companies may have privileged access due to trade regula-tions, a better knowledge of consumer tastes and an ability to deliver goods of an inter-mediate product quality at competitive prices that match the spending power in these mar-kets (Herrigel et al., 2013; Brandt and Thun,  2010; Kadarusman and Nadvi, 2013, 1024–25). Thereby the domestic market constitutes a beneficial terrain for industrial upgrading since “learning opportunities in domestic markets and neighbouring countries with similar levels of development can be greater [than through exporting to developed markets, F.B] for cer-tain types of skills needed by developing coun-try firms to compete in the global economy” (Navas-Alemán, 2011, 1386).The aim of this article is to analyse if and how the local embeddedness of companies affects the chosen strategies and their ability to achieve ‘recoupling’ in terms of new strategies by which companies can gain competitive advantages in GPN or on the domestic market. By posing the question in such a way, our analysis offers insights into the local political economies of industrial upgrading and at the same time pro-vides a deeper understanding of the geographical transformation of China’s industry which is “rap-idly changing from one dominated by assembly for export markets to one that comprises more organisationally and geographically complex global and regional production networks” (Zhu and He, 2013, 347).   a  t  T  UL B J   e n a  on J   ul   y1  5  ,2  0 1  5 h  t   t   p :  /   /   c  j  r  e  s  . oxf   or  d  j   o ur n a l   s  . or  g /  D o wnl   o a  d  e  d f  r  om   Page 5 of 16 Growing against the odds The analysis focuses on two textile and garment clusters in Dongguan, namely Humen, a production and marketing hub of the general fashion industry (i.e. primar-ily woven garments); and Dalang, a pre-dominantly export-oriented cluster of the knitwear industry. In each cluster, the sam-ple consists of qualitative data from factory visits and several rounds of interviews with senior management staff at the two largest companies of each cluster. The companies were selected on the basis of size and eager-ness to transform established production models. The rationale was to identify the processes of industrial transformation at the most advanced companies in each cluster, not to compile a representative cross section of the entire garment industry in each clus-ter. The data from the largest producers was complemented by information from smaller producers gathered at local trade fairs and in extensive interviews with leading govern-ment officials as well as with employees at supplementary institutions such as technical schools and innovation centres. The informa-tion from a total of 27 qualitative, semi-struc-tured interviews was analysed according to the method of qualitative content analysis as proposed by Gläser and Laudel (2010). Garment production in China: export supremacy and domestic market growth Before we describe the current transforma-tion of garment clusters of the PRD in detail, we will now provide a short overview of the general development trends in the Chinese garment industry. It shows that Chinese com-panies continue to play a dominant role in the global garment industry based on their unin-terrupted expansion on export markets and rapidly increasing domestic sales. This is subse-quently interpreted as the consequence of suc-cessful strategic recoupling of local assets with a changing demand structure.As Figure 1 shows, the Chinese garment indus-try experienced strong growth in the post-cri-sis period. The shock of economic contraction in 2009 proved to be a brief intermezzo with growth quickly resurging, albeit not at the pre-crisis pace. A comparison of Chinese output with those South-East Asian countries that have emerged as low-cost competitors over the past decade shows a significant quantita-tive leadership of the Chinese export industry. In absolute numbers, the volume of output growth between 2009 and 2013 surpassed that of Vietnam, Cambodia and Bangladesh combined.A catch-up process by South-East Asian exporters becomes evident when consider-ing the growth rates in the post-crisis period (Table 1). However, Chinese garment exports grew at an average rate of almost 9% between 2009 and 2013 which defies the notion of a decline of the Chinese industry due to an over-all shift of global sourcing from China to neigh-bouring regions.Most importantly, as Chinese exports have increased during this period, producers in Bangladesh, Vietnam and Cambodia are not expanding at the cost of Chinese producers in terms of aggregate production volumes. 3  Rather, the pattern is one of growing overall dominance of Asian producers vis-à-vis other exporters. Bangladesh, Vietnam, Cambodia and China combined have been eating into the export shares of other exporters in a man-ner reminiscent of the period of 2005–2009 (cf. Frederick and Gereffi, 2011, 69–72).A thorough empirical investigation into the precise reasons for the ongoing dominance of the Chinese garment industry on the world market is beyond the scope of this investiga-tion. However, it is worth noting some possi-ble explanations that have been submitted in recent analyses:First, Chinese producers can benefit from a heterogeneous socio-spatial structure and from pronounced efforts by the central govern-ment to divert investment to less-developed  a  t  T  UL B J   e n a  on J   ul   y1  5  ,2  0 1  5 h  t   t   p :  /   /   c  j  r  e  s  . oxf   or  d  j   o ur n a l   s  . or  g /  D o wnl   o a  d  e  d f  r  om 
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