INSTITUTE OF DEVELOPING ECONOMIESIDE Discussion Papers are preliminary materials circulated
to stimulate discussions and critical comments

IDE DISCUSSION PAPER No. 373

Is the Vietnamese Garment Industry
at a Turning Point?: Upgrading fromthe Export to the Domestic Market
Kenta GOTO*
December, 2012
Abstract
Vietnam’s garment industry has been loosely characterized by the duality based onmarket orientation: export and domestic. Export-oriented garment suppliers weretypically SOEs and foreign invested firms, while those producing for the domestic
market have been mostly small, private companies. With a booming economy, otherindustrial sectors have emerged, and the garment industry is no longer the sector
most favored by workers. Wage rates have been increasing, and a supplier’s ability
to cope with this through successful upgrading has been the key determinant of
whether it can further grow and flourish. Those who fail to cope are finding
themselves in an increasingly difficult position. This paper looks at both theexport- and domestic-oriented garment suppliers, and attempts to highlight how
the industry can further develop by examining the bottlenecks that vary dependingon the type of supplier. It suggests that in the long run, upgrading and value
addition in the domestic market will be the key strategy.

Keywords: Vietnam, garment, global value chains, upgrading
JEL classification: F63, L67, O14, O53*Associate Professor, Faculty of Economics, Kansai University (gotoken@kansai-u.ac.jp)

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Is the Vietnamese Garment Industry at a Turning Point?
Upgrading from the Export to the Domestic Market1
Kenta Goto2
December, 2012

Abstract
Vietnam’s garment industry has been loosely characterized by the duality based onmarket orientation: export and domestic. Export-oriented garment suppliers weretypically SOEs and foreign invested firms, while those producing for the domestic
market have been mostly small, private companies.
With a booming economy, other industrial sectors have emerged, and thegarment industry is no longer the sector most favored by workers. Wage rates havebeen increasing, and a supplier’s ability to cope with this through successful
upgrading has been the key determinant of whether it can further grow and flourish.
Those who fail to cope are finding themselves in an increasingly difficult position.
This paper looks at both the export- and domestic-oriented garment
suppliers, and attempts to highlight how the industry can further develop by
examining the bottlenecks that vary depending on the type of supplier. It suggests thatin the long run, upgrading and value addition in the domestic market will be the key
strategy.
Keywords: Vietnam, garment, global value chains, upgrading
JEL Classification: F63, L67, O14, O53

1 Introduction
The termination of the Multifibre Arrangement (MFA) at the beginning of 2005 induced
significant structural changes in the global garment trade. Countries whose exports to
the US and EU markets had previously been “guaranteed” under the quota system faced
1

This paper has been produced under an IDE project “ Dynamics of the Garment Industry in
Low-income Countries following the MFA Phase-out”. The author is grateful to the useful
discussions with and advice from the research members of this project including Yoko Asuyama,
Takahiro Fukunishi, Toshihiro Kudo, Momoe Makino and Tatsufumi Yamagata (all IDE), and toJohn Thoburn (University of East Anglia) for valuable comments on an earlier draft. All remaining
errors are, of course, mine.
2
Associate professor, Faculty of Economics, Kansai University.
(e-mail: gotoken@kansai-u.ac.jp).

1

immense competition from more competitive suppliers that were restricted under the
MFA regime. With this event, a large number of African suppliers had to strive in orderto sustain their export shares whilst many of the Asian exporters recorded growth inexports. Vietnam is one such high-performing country whose growth has beenremarkable; its export value in 2011 was US$14 billion3, which more than tripled from2004 (US$4.2 billion).
While Vietnam’s garment export growth has been impressive, the industry isfacing challenges in its domestic economic environment, primarily due to acute labor
shortages and rapidly rising wage rates. At the aggregate level, its garment industry is
growing robustly, but at the enterprise level performance varies significantly. Garment
suppliers which have been successful in process and product upgrading were able toattract more orders and could afford to pay higher wages, while the less successful ones
had to struggle with filling their empty production lines, coping with deteriorating
contractual terms (particularly in prices) and with retaining workers (Goto et al. 2011).
However, process and product upgrading will eventually reach their limits, and further
upgrading in function will become inevitable even for the most competitive exportoriented suppliers. Functional upgrading and moving into higher value added functions
has already become important for such suppliers.
On the other hand, Vietnam’s domestic garment market is currently catered bysmaller private garment suppliers. Quite a number of these domestic-oriented suppliers
undertake the more knowledge intensive functions including in-house design, branding
and marketing, in which export suppliers have no experience. With the emergence of a
dynamic middle-income class, particularly in its urban areas such as Hanoi and Ho Chi
Minh City, the domestic garment sector is growing rapidly with promising prospects forbusinesses. New apparel retailers have evolved in the last decade, filling majorcommercial streets and shopping centers. Although this domestic-oriented industry has
enormous potential, domestic suppliers lack the technical efficiency in the production
processes that export suppliers have accumulated over the years by producing garments
in value chains that are coordinated by foreign buyers.
3

Source: Vietnam customs database(http://www.customs.gov.vn/English/Lists/SupportOnline/ThongKeHaiQuan.aspx), accessed on
September 26, 2012.

2

This paper looks at both the export- and domestic-oriented aspects of thegarment industry and attempts to highlight how the industry can further develop bylooking at each of the bottlenecks that appear among different types of suppliers (export
or domestic). The paper is organized as follows. The next section provides an outline of
the Vietnamese garment industry. Section Three will attempt to look at whether
upgrading has happened in the industry, categorize garment suppliers according to theirmarket orientation, and compare their key attributes and differences in the functional
modalities of garment production. Section Four will look at the possibilities offunctional upgrading by looking at the domestic market. This will be followed by adiscussion section, and the final section will present the conclusion.

2 Outline of the Vietnamese Garment Industry
The garment industry has been Vietnam’s largest manufacturing-based export sector
since its integration into the global economy in the early 1990s. Its growth has been
rapid since, with an export volume of around US$ 10.3 billion in 2010, which is thelargest export commodity and represents about 14.4 percent of all exports from
Vietnam.

Figure 1: Export Performance of the Vietnamese Garment Industry
12,000

20.0%
18.0%
16.0%
14.0%

8,000

12.0%
6,000

10.0%
8.0%

4,000

Export share

Garment export ($million)

10,000Garment
ExportExport share

6.0%
4.0%

2,000

2.0%
0

0.0%

Source: UN Comtrade, SITR rev.3 (84).

Despite the presence of a large domestic textile sector, Vietnam’s
export-oriented garment industry is highly import intensive as the local textile industry3

is uncompetitive, particularly in terms of quality. Therefore, production for exports
takes the contractual form often referred to as CMT, which stands for “cut, make andtrim”. Under a CMT production modality, Vietnamese garment suppliers receive input
materials free of charge from international buyers. The CMT modality is essentially aninternational putting-out system in which Vietnamese garment suppliers arecompensated primarily for their labor costs, the functions of which are highly labor
intensive and relatively low skill-intensity (Nadvi and Thoburn 2004; Goto et al. 2011).
Other functions such as procurement of input materials, designing, branding, andmarketing are all catered by international buyers (Goto 2007).
Coordination of production and distribution in global value chains areundertaken by such international buyers, which are typically trading companies andwholesalers. However, in some cases such coordinating roles are also undertaken
directly by retailers and brand apparel companies. In the global value chain literature,these coordinators are key as they exercise power over decisions such as where to
produce what and how. The international buyers are therefore important as theyessentially control and determine entry of garment suppliers into the value chain (Gotoet al. 2011).
When Vietnam opened up its economy to the West in the early 1990s, it had alarge surplus of labor with one of the lowest wage levels in the region. As theattractiveness of a supplier under a CMT modality is highly dependent on wage levels,
Vietnam’s strength in garment exports has grown significantly in terms of comparativeadvantage. Balassa’s concept of revealed comparative advantage (Balassa 1965) isuseful in looking at this trend, and here we use two different indices to measure this.4
The first index is the Relative Performance Index (RPI), which is calculated as
ܺ௜௝௧
൘∑ ܺ
⎡
⎤
௜ ௜௝௧
⎢
⎥
ܴܲ‫ܫ‬௜௝௧ = ⎢⎥∑௝ ܺ௜௝௧൘∑ ∑ ܺ ⎥⎢௝ ௜ ௜௝௧
⎣⎦4

For a similar analysis on the garment industry of Thailand, see Goto and Endo (forthcoming).

4

where RPIijt is the Relative Performance Index for industry i of country j, year t; and Xijt
is the value of export of industry i of country j, year t. Therefore, ∑௜ܺ௜௝௧ is the totalexports of country j (all industries), year t; and ∑௝ ∑௜ܺ௜௝௧ is the total value of world
exports (all industries) of year t.

The RPI is an index that compares the export share of the Vietnamese garment
industry with the world’s industry’s aggregate export share. Country j has comparativeadvantage in industry i if RPI > 1. As this index does not take into account the size ofimports of that same industry, which could be large in some countries, we also look at
the Relative Export-Import Ratio (REIR), which is defined as
ܺ௜௝௧
൘‫ܯ‬
⎡
⎤
௜௝௧
⎢
⎥
ܴ‫ܴܫܧ‬௜௝௧ = ⎢⎥∑௝ ܺ௜௝௧
൘⎢∑௝ ‫ ܯ‬௜௝௧⎥⎣⎦
where REIRijt is the Relative Export-Import Ratio for industry i of country j, year t; Mijt
is the value of imports of industry i of country j, year t; ∑௝ ܺ௜௝௧ is the value of world
exports of industry i, year t; and ∑௝ ‫ ܯ‬௜௝௧ is the value of world imports of industry i,year t.

The REIR likewise reflects the country’s comparative advantage, given thetariff structures and other protection measures in year t. Figure 2 summarizes the results
for the period during 2000 through 2010. The figure depicts a rapid increase in theinternational comparative advantage of the Vietnamese garment industry during theabove period, which started in the early 1990s. Both the RPI and REIR are significantly
larger than 1 (6.1 and 34.9, respectively, in 2010).
The increase of REIR is partially due to robust growth in garment exports;
however, part of this also stems from an absolute decline in imports in the case ofVietnam. The import of garments dropped significantly from US$434 million in 2000 to
US$154 million in 2007. Nevertheless, imports have risen steadily since, reaching
US$289 million in 2010.

5

Figure 2: Revealed comparative advantage
7.0

50.0
46.3
45.0

43.4
6.0

35.0
29.4

30.0

28.9

4.0

30.0

RCA

26.0
25.0
21.2

3.0
16.9

20.4
20.0

15.4

REIR / Import (10 million US$)

40.0

37.0
5.0

Imports(US$million,
RHS)
RPI (LHS)

REIR (RHS)

15.0

2.0

10.0
1.0
5.0
0.0

0.0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: UNComtrade.

The industry is also significant in terms of the number of workers it employs,
which in 2010 was about 861,000, which has grown 3.7 times the number in 2000
(232,000). Likewise, the increase in the number of garment suppliers in the last decadeis also impressive, which grew almost seven-fold during the same decade, from 597 to
4030.

1,000,000

4,500

900,000

4,000

Number of workers

800,000

3,500

700,000

3,000

600,000

2,500

500,000
2,000

400,000

1,500

300,000

Number of garment suppliers

Figure 3：Trends in the Number of Garment Suppliers and Workers

Number ofworkers
Number ofgarment
suppliers

1,000

200,000

500

100,000
0

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Statistical Yearbook 2001、2007, 2010 and 2011 (GSO）.

Within this, the industry has been undergoing some structural changes, one ofwhich has to do with ownership. Table 1 describes the compositional change of output
based on the different ownership categories of state-owned enterprises (SOEs),
6

non-SOEs (collective enterprises, private enterprises and household enterprises), andforeign-invested companies. In 1995, when Vietnam’s garment industry started
producing and exporting to the “western” markets, most of the export-oriented garments
were produced by SOEs and accounted for more than a third of its total output.
Household enterprises (kinh te ca te), which are self-employed micro entities, often
informal, occupy 35.7 percent of total output and are the largest ownership form ofgarment suppliers.
In 2011, however, the share of SOEs shrunk to 8.4 percent, while theforeign-invested companies (48.4%) have taken over the position of the dominantownership form in the industry. While data for the output share of “private” and“household” enterprises are not available for 2011, they have been 24.5% and 12% in2010 respectively, which suggests a large change in their importance in comparison to
1995. Nevertheless, it should be noted that, as a significant number of SOEs haveundergone an “equitization” program and are being re-classified as either SOEs or
private companies, it is highly likely that the former SOEs still play dominant roles
particularly in the export of garments.

Table 1: Output Based on Ownership
Output (Total, garment industry)SOEs
Non-SOEs
Collective enterprises(kinh te tap the)

1995

2000

2005

2006

2007

2008

2009

2010

2011

2,950

6,042

15,354

19,166

22,77627,20629,14634,31339,872
3,365

1,025

1,926

3,823

3,939

3,001

2,723

2,422

2,810

34.8%

31.9%

24.9%

20.6%

13.2%

10.0%

8.3%

8.2%

8.4%

1,389

2,616

5,873

7,744

10,174

12,32812,51915,10817,194

47.1%

43.3%

38.2%

40.4%

44.7%

45.3%

43.0%

44.0%

43.1%

9

45

69

59

60

74

39

39

na

0.3%

0.7%

0.4%

0.3%

0.3%

0.3%

0.1%

0.1%

na

Private （2）

327

1,056

3,398

4,893

6,849

8,656

8,372

8,393

na

(kinh te tu nhan)

11.1%

17.5%

22.1%

25.5%

30.1%

31.8%

28.7%

24.5%

na

Household

1,053

1,516

2,406

2,792

3,265

3,598

4,109

4,114

na

(king te ca the)

35.7%

25.1%

15.7%

14.6%

14.3%

13.2%

14.1%

12.0%

na

Foreign invested

536

1,500

5,658

7,483

9,601

12,155

14,204

16,395

19,313

18.2%

24.8%

36.9%

39.0%

42.2%

44.7%

48.7%

47.8%

48.4%

Source: Statistical Yearbook 1999, 2000, 2001, 2003, 2007 and 2010（GSO）.
Note 1: Upper rows denote output values in VND1 billion (1994 prices), and lower rows are shares.
Note 2: The output figures for 1997, 1998 and 1999 are based on the author's calculation.

Table 2 summarizes the firm size distribution in the garment industry. Larger
firms occupy a larger share in the garment industry in comparison to the overall
economy; while the share of firms with more than 500 workers is 0.9 percent for “allindustry”, it is 11.0 percent for the garment sector. It is worth mentioning that enterprisecharacteristics, particularly ownership and size, have a strong relationship with market
7orientation, i.e., export or domestic. Most of the larger garment suppliers are SOEs (orequitized SOEs), which have been playing key roles in the export-oriented garment
industry as they were able to enjoy preferential government support in connecting withforeign markets when Vietnam started integrating into the global economy in the early
1990s (Hill 2000, Goto 2003, Thomsen 2007). Such export-oriented suppliers are in
general also better equipped with capital in comparison to smaller domestic garment
suppliers. The smallest firms in the industry are primarily household enterprises, whichcater mainly to the domestic market and are rarely connected to the export-oriented
value chain.
Table 2： Firm Size Distribution （2010）
Number of workers
Number of enterprises(garment industry)
Share
Number of enterprises
industry)

(all

Share

Less than 5

5-9

10-49

50-199200-299

300-499500-999

1000-4999

over 5000

458

771

1190

796

152

218

230

203

12

Total
4030

11.4%

19.1%

29.5%

19.8%

3.8%

5.4%

5.7%

5.0%

0.30%

100%

77933

100539

86723

18711

2562

2116

1564

1051

100

291299

26.8%

34.5%

29.8%

6.4%

0.9%

0.7%

0.5%

0.4%

0.03%

100%

Source: Statistical Yearbook 2011.

While the growth of Vietnam’s garment industry is remarkable, the recent
increase in general wage levels has put serious pressures on garment suppliers. Table 3
summarizes average annual wages in the garment industry and compares them with theaverages of manufacturing and all industries.
Table 3: Wage Comparison

Unit: VND1,000
2002

2003

2004

2005

2006

2007

Garment industry

994

1080

1133

1208

1436

1627

2008
1977

Annual wage increase (YoY)

--

8.7%

4.9%

6.6%

18.9%

13.3%

21.5%

Manufacturing average

1145

1243

1327

1450

1669

1922

2342

Annual wage increase (YoY)

--

8.6%

6.8%

9.3%

15.1%

15.2%

21.9%

All industries average

1249

1422

1476

1712

1967

2342

2803

Annual wage increase (YoY)

--

13.9%

3.8%

16.0%

15.0%

19.1%

19.7%

Source: Enterpris e Survey, GSO 2007 a nd 2010.

Wage levels in the garment industry have been increasing rapidly (the annual
increase in 2008 was 21.5%); however, wage levels in other industries have increased ata similar or faster rate. As a result, wage rates in the garment industry have dropped well
below the manufacturing and overall industry average.
Garment suppliers are therefore in a difficult position when it comes to8

securing enough workers as labor demand in other sectors has increased along with therobustly growing economy, intensifying competition in the recruitment of workers.
From field work in 2011 and 2012 in Hanoi and Ho Chi Minh City, the relative
attractiveness of a job in the garment industry seems to be rapidly eroding with the
decline in its relative wage levels, making this sector no longer among the most popularand attractive for workers in Vietnam. Suppliers’ ability to hire and retain workers
depends on their ability to cope with the rapidly increasing wage level, and this in turnis dependent on whether upgrading in process, product or function has occurred.
However, as there have been no significant shifts from CMT to other types of
production modalities in the export sector (i.e., no functional upgrading), upgrading has
been more or less confined to either process or products. Those who were successful in
upgrading have been able to realize increased efficiency and attract workers with higher
wages, while those who have failed have been shrinking and losing drastically (Goto etal. 2011).

3 Competitiveness, Value-added and Upgrading
As described earlier, the export sector has been dominated by large (former) SOEs andforeign-invested suppliers, and the relatively smaller private suppliers have been mainly
domestic market-oriented. Typically, the export sector is coordinated by foreign buyers,
and Vietnamese suppliers produce garments to the buyer’s specifications under a CMT
contract. Under such a production modality, technology transfer in the production
process has been significant, particularly for exports bound for Japan, as buyers for thismarket often send Japanese technical staff to Vietnamese garment suppliers on arelatively long-term basis. This is in practice a costly commitment for buyers. In
addition, it is quite common for such buyers to provide advanced machineries tosuppliers, enabling them to produce higher value-added products. Because these typesof investments are de-facto context specific, buyers tend to prefer to establish along-term, stable business relationship with Vietnamese suppliers, which has worked
well both for buyers and suppliers (Goto et al. 2011).
For Vietnamese export oriented garment suppliers, competitive firms have beenable to reap higher value-added due to their ability to upgrade within the changing

9

business environment. In this paper, we define process upgrading as any increases in thenumber of physical output per worker (operational-based physical productivity), andproduct upgrading as the increase in the per unit product value-added. The total
value-added of a supplier is basically the product of operational-based physicalproductivity, the number of workers, and per unit product value-added which can be
described asܸ‫= ܣ‬ܸܳ‫ܣ‬× ‫×ܮ‬‫ܮ‬ܳ

(1)where VA is total value-added, Q is the total number of garments produced within agiven period of time, and L is the total number of workers. We will get the value-added
per worker by dividing (1) by Lܸ‫ܣܸ ܳ ܣ‬
= ×
‫ܮ‬
‫ܳ ܮ‬

(2)

Therefore, any changes in the value-added per worker
ொொchanges in ௅ (or ∆ ௅ ) and/or
௏஺

௏஺
ொ

௏஺

௏஺
௅

ொ

௏஺

(or ∆ ௅ ), are a result of(or ∆ ொ ). Note that ∆ ௅ refers to the degree ofprocess upgrading, and ∆ ொ to that of product upgrading. We will next attempt to lookat the Vietnamese garment industry in terms of these two different types of upgrading.
ࢂ࡭

3-1 Product upgrading (∆ ࡽ )First, in order to see whether any upgrading in products has happened in theexport sector, we will look at the changes in the unit export values between 2004
(before the end of the MFA) and 2010 for its three major export destinations including
the US, EU and Japan 5 . The US has been the largest export destination for the5

It should be noted that unit prices do not necessarily imply value added, as these could just simply
reflect the higher materials costs used in the production of the garments, which in the case ofVietnam are mostly imported, and other product specific attributes such as specifications and designs,
which are already embedded in each of the products. This is a particular attribute of a CMT based
contract. Most of the “FOB” based contracts are the same as they essentially differ from the CMT

10

Vietnamese garment industry since 2001 when the Vietnam-US Bilateral Trade
Agreement (USBTA) came into effect, occupying around half of all its garment exports.
This is followed by EU and Japan. Country-wise, Japan is the second largest export
destination for the Vietnamese garment industry. Unit product values is taken from HS
import data which are disaggregated at the 10 digit level for the US, 8 for the EU and 9
for Japan for both 2004 and 2010, with which the averages weighted by quantity sharesfor each of the different categories are calculated and compared. The aggregate average
unit values (AUV) are calculated as follows. Let θi,t be the import share (based on
quantity) of product i at year t, and the unit import value of product i at year t be pi,t.
The AUV is described as‫ = ܸܷܣ‬෍ ൫ߠ௜,௧൯൫‫݌‬௜,௧൯௜,௧

The change of AUV during 2010 and 2004 is therefore∆‫ = ܸܷܣ‬෍ ൛൫ߠ௜,ଶ଴ଵ଴൯൫‫݌‬௜,ଶ଴ଵ଴൯− ൫ߠ௜,ଶ଴଴ସ൯൫‫݌‬௜,ଶ଴଴ସ൯ൟ
௜As the changes in the aggregate averages for these unit values (∆‫ )ܸܷܣ‬include both theactual value changes within each of the product categories and the compositionalchanges among product categories, these have to be decomposed. While positivechanges in both represent product upgrading, the implications are slightly different. Achange in a particular product category (same HS code for both 2004 and 2010) is most
likely a result of changes in product specifications and input materials, while
compositional changes (shifts from one HS code to another) suggests inter-productreallocation of orders from the key buyers. For example, a buyer can decide to placeorders for the same product category with increasingly complex product specification
using more expensive fabrics, which would lead to higher value-added products. This
will be reflected in an increase of the unit value within the product category. However,based ones only on the point that garment suppliers “purchase” the input materials, which are
pre-specified and designated by buyers. See Goto (2007) for a detailed discussion on this.

11

another buyer may decide to place more orders to product categories which are in
general of higher value added; for instance, reallocating orders from shirts to suits.
These changes will be reflected as a positive change in compositional changes. We willrefer to the first effect as intra-product upgrading, and the second as inter-productupgrading. These two effects are decomposed as follows (Griliches and Regev, 1995;
Asuyama et al., 2012).
ߠ௜,ଶ଴ଵ଴ + ߠ௜,ଶ଴଴ସ
∆‫ = ܷܲܣ‬෍ ൤൬൰൫‫݌‬௜,ଶ଴ଵ଴ − ‫݌‬௜,ଶ଴଴ସ൯൨
2௜‫݌‬௜,ଶ଴ଵ଴ + ‫݌‬௜,ଶ଴଴ସ+ ෍ ൤൬
൰൫ߠ௜,ଶ଴ଵ଴ − ߠ௜,ଶ଴଴ସ൯൨
2
௜

The first and the second term in the equation represent the intra-product upgrading andinter-product upgrading, respectively. Table 4 summarizes the results.
Table 4: Weighted average unit prices and the decomposed sources
AUP
Unit

share

∆AUP
2004

US

Dozen

100%

Dozen

91.32%

Tons

8.68%

99.51%

Japan

Tons

0.49%

43.1
-20.5%
75.9
52.2%
58.9
381.4%
6,454.9-12.1%
87.78
73.5
8.3%
2,038.6-19.2%
87.78
23.2
-0.4%

49.9

EU

Dozen

2010
54.2

12.2
Japanese Yen

7,346.3

Exchange rate (Yen per 1US$)US Dollar

108.1967.9Japanese Yen

2,522.0

Exchange rate (1US$)US Dollar

108.19
23.3

-11.1
26.0
46.6
-891.45.6-483.4-0.1

Intra-productupgradingInter-productupgrading

-1.0
-1.8%
15.7
31.5%
7.4
60.2%
-623.5-8.5%-10.1-18.7%
10.3
20.6%
39.3
321.2%-267.9
-3.6%

8.6
12.7%
-5,284.0-209.5%-3.0-4.4%
4,800.6
190.4%-41.1-176.5%41.1
176.1%

Total import value
in 2010 from
Vietnam(Million US$)5,797.5

1,808.6

1,161.4

Sources: (1) data for US and EU are from World Trade Atlas, and Japan from the Ministry of Finance.
(2) Dollar-Yen exchange rate, US department of Commerce (http://www.mac.doc.gov/japan-korea/statistics/exchange.htm, accessed on September 28, 2012).
Note: The unit of measurement for most of the HS categories have been in the number of products (dozens or pieces), which have been converted into dozen in this table.
However, there were some categories which are only reported in weight (tons) in the import statistics of EU and Japan. The ∆AUP for such categories have been calculated
separately. It should be noted that for both EU and Japan such products occupy only a small share in terms of value in 2010 (8.7% and 0.5% respectively).

As the import quantities for the HS product categories have been reported mostof the times in both the number of products and weight, we have unified the unit ofmeasurement in the number of products (dozens). However, as some of the productcategories for the EU and Japan have only been reported in tons, these have been
separated out and the ∆‫ܸܷܣ‬s for those product categories have been calculated and12presented separately in table 4. Nevertheless, as the share of such product categories has
been quite small for both the EU and Japan (8.7% and 0.5% for EU and Japan,
respectively), we focus our analysis on the ∆‫ܸܷܣ‬s that were either reported orconverted into dozens.

In 2004, the AUP for garments exported to the Japanese market was the highest,
which was followed by the EU and US. In 2010 that for Japan and the EU were almost
the same, while the US was very low. Garments exported to the EU and Japan bothindicate positive product upgrading during 2004 and 2010, while ∆‫ ܸܷܣ‬has been
negative for US for the same period.

In more detail, garments exported to the EU market suggest that productupgrading has been most significant, which are the result of both intra- andinter-product upgrading. Garments exported to the Japanese market are also of higher
value added (in dollar terms), which has been based mostly on intra-product upgrading.
It should be noted, however, that for the positive changes in intra-product upgrading for
the Japanese market is primarily due to the exchange rate effect. Garments for the US
market, on the other hand, suggests both intra- and inter-product downgrading, wheremost of the reductions in unit prices come from inter-product downgrading.
Since the results differ significantly among the three major export destinations,
we cannot say anything conclusive about the overall product upgrading performance ofVietnam’s export oriented garment industry. Considering that the export volume to the
US is roughly three times larger than that to the EU and five times larger than to Japan,
overall product upgrading in Vietnam may not as significant. However, this difference
according to major destinations is what characterizes the Vietnamese garment industry,where inter-industrial enterprise performance varies to a significant degree, which is tosome extent dependent on export orientation (Goto et al, 2011). Moreover, as garment
suppliers in Vietnam have also changed their customer base, individual supplier’s
product upgrading performance is also difficult to assess using such industry levelstatistics. For example, since the USBTA in 2001, orders for the Japanese market hasconstantly been crowded-out from their traditional suppliers’ production lines, and been
overtaken in many cases by buyers who serve both EU and US markets.

13ࡽ

3-2 Process upgrading (∆ ࡸ)

Process upgrading is difficult to assess using only value-added or price data, asthese do not necessarily reflect the changes in physical output per worker, or
operational-based physical productivity. When prices offered from buyers have been
decreasing while operational costs, particularly labor costs, are increasing, garment
suppliers have no ways to survive other than to upgrade. As we have discussed in theprevious section, while changes in average unit values for products for the EU market
suggest significant upgrading both within and across product categories, there havebeen no convincing evidence indicating upgrading towards more higher value added
products (inter-product upgrading) for exports for the US and Japanese markets; mostbuyers have either kept their orders in the same product category or shifted towards
more lower value-added categories. Under such situations, however, garment suppliers
can still survive by upgrading in terms of processes, which can be achieved byintroducing new machineries and production technologies. These include the moreintangible aspects of production processes such as managerial skills at both the
shop-floor and management levels. While there are only a limited number of suchstudies, Goto et al (2011) report significant process upgrading in Vietnam’s exportoriented garment industry serving for the EU and especially the Japanese market; anefficiency gain of around 30-50%. They also report that enterprise performance inprocess upgrading has been very unequal among suppliers, in which the degree oftechnological transfer from buyer to suppliers were important, which were determinedby the supplier-buyer relationships.
The fact that international buyers played an important role in technologicaltransfer, and thus process upgrading of export oriented suppliers, becomes more evident
when they are compared with suppliers serving mainly the domestic market and wheresuch transfer cannot be expected. Table 5 summarizes the key firm-specific attributes ofthe four different types of suppliers. In terms of the number of workers, export suppliers
are the largest and domestic subcontractors the smallest. Domestic contractors anddomestic original brand suppliers are in between, with similar firm sizes. Wages arehighest for domestic original brand suppliers, followed by domestic contractors andexport suppliers. The relative high wages at the domestic original brand suppliers may

14

have to do with what Fung et al (2007) refers to as capturing the “soft dollars”, which
accrue in non-production related functions such as branding, designing, distribution andmarketing. This is essentially a higher value-added function in comparison to theassembly process (CMT), and we will discuss this in more detail later. Wages atdomestic subcontractors are significantly lower than any other supplier type.6 Average
operational-based physical productivity is highest for export suppliers and domestic
contractors and is lowest for domestic original brand suppliers. In terms of shop floor
production systems, the export suppliers and domestic contractors both apply aprogressive bundle system (PBS).7 Domestic original brand suppliers mostly apply an
individual production system (IPS), where one person performs all the processes andproduces the entire garment without any division of labor in the process. However, mostof the larger domestic original brand suppliers use the PBS.
Table 5: Key Characteristics of Different Garment Suppliers
Export suppliers

Domestic
subcontractors

Domestic
contractors

Domestic original
brand suppliers

Average number of workers

255.0

7.7

30.1

46.0

Average monthly wages

1016.9577.41033.91325.0

15.36

10.44

14.89

6.19

(2)

IPS

PBS

IPS/PBS

7

4

6

2

Average productivity (pieces per operator, per day)(1)

Shop floor production system

PBS

Number of observations
Note 1: Long-sleeve, woven men's shirt.
Note 2: PBS stands for "Progressive Bundle System".
Source: Modified using Goto (2006 and 2011).

Ideally the productivities of each garment suppliers should be evaluated andcompared based on per worker value-added, however this has not been possible in our

6

While the relative difference remains similar, it should be noted that the wage data in Table 5 isfrom 2004 as comparative up-to-date data with a sample of more than two for each firm type is notavailable, and that the data is substantially lower than that in 2011 when field work for this paper
was conducted.
7
The PBS is a system where the production process is divided among the number of operators in aparticular production line and allocated along the production line so that each operator can finish
their allocated work in the same amount of time. The semi-processed pieces are bundled together
and passed onto the next process in the production line. Among the export-oriented suppliers, moststill use the PBS; however, those with a large number of skilled operators have introduced the unit
production system (UPS) where the semi-processed pieces are transported between operators by anautomated overhead transport system. The introduction of this often leads to an increase in physicaloutput per person; however, as it requires a substantially larger amount of investment, it does not pay
off when wage levels are low (one manager we interviewed in 2011 said that wage rates must at least
exceed VND3.5 million).

15

case as we do not have such supplier specific information that allows for consistent andstatistically meaningful analyses. Nevertheless, in the case of an CMT based exportoriented supplier, their value-added per worker should be highly correlated with thisoperational-based physical productivity, as the CMT prices that global buyers arewilling to offer to those suppliers is very homogeneous across different suppliers within
the same product category8. This is most likely due to the competitive nature of thegarment industry. From our field work in both 2011 and 2012, a number of exportoriented garment suppliers noted that buyers, particularly those serving the US market,
are very sensitive to CMT prices in making sourcing decisions. For example, frominterviews to two major Japanese buyers (trading companies) and a few Vietnamese
suppliers, the CMT for a long-sleeved, men’s woven shirt for the Japanese market has
been very stable over the last couple of years, floating at a rate between US$ 1.1 to 1.2.
Likewise, the CMT for the same product is normally lower for the EU and US markets
as buyers for these market offer an order with a larger quantity. While the CMT forthese markets has also been quite stable, quite a few suppliers we visited in 2012 notedthat their CMTs had been reduced since consumer demand in both markets had beenstagnating, or in worse cases lost the orders they had in the previous years to othersuppliers in other countries where wage levels were lower such as Bangladesh.

3-3 Functional upgrading
On the other hand, smaller private garment suppliers have evolved primarily
around the domestic market, where product quality requirements are much lessdemanding. Most suppliers had no contact with foreign buyers, and thus there wasliterally no channel for technology transfer related to the production process. However,thesedomestic

market-oriented

suppliers

assumedfromtheoutsetmore

knowledge-intensive functions such as product design, branding and marketing, andthey have been accumulating experience in these functions through the local market.
8

If we can assume that a CMT based export suppliers’ income is solely derived from the CMT
charges, then their total value added should be calculated as (total output) times (CMT) divided by
the number of total workers. When the CMT charges are very homogeneous and inter-firm
difference small for the same product categories, and the proportion of non-direct operators anddirect operators are similar across suppliers, then the suppliers’ productivity should be roughly
represented in the operational-based physical output. However, as we have no data to support thisargument, this part should be treated with caution.

16

With an evolving middle-income class particularly in urban areas, Vietnam’s
domestic-oriented garment sector is booming, providing good business prospects forthese small private garment suppliers (Goto 2006).
Of

course,knowledge-intensive

not

all

functions,domestic-oriented
and

this

requiressuppliers

undertakeelaboration.

In

such

general,domestic-oriented garment suppliers can be classified into the following three types.
The first are private suppliers that produce low-quality products with simple
specifications for the low-end volume zone (domestic contractors). They procure inputs
from local markets and textile agents, and they produce garments which include
imitations of foreign brand apparel. Most of the garments are highly homogeneous interms of design and materials used. These products are typically distributed throughlocal wholesale markets, where buyers are mostly small-scale secondary wholesalers
and retailers for more remote markets. Such buyers make purchase decisions based on
prices and other favorable business terms they can receive from suppliers, such as theprovision of informal trade credit. The second are very small, micro suppliers who
primarily undertake subcontracting orders from domestic contractors (domestic
subcontractors). This second type of supplier functions just like CMT-based export
garment suppliers, as input materials and specifications are all provided from the larger
contractors/buyers.9 Finally, the third type of supplier is those who have their own
branded apparel and produce products based on in-house design and specifications witha strong view to differentiate themselves from others (domestic original brand suppliers).
Most have their brand names registered and their products are typically distributed
through their own retail stores. “Domestic market-oriented suppliers” as used in thispaper refers to this third type of supplier.
The dual structure based on market orientation was quite evident in the 1990s
and early 2000s; however, this demarcation has been fading since the late 2000s. Large
export-oriented garment suppliers were not actively pursuing business opportunities inthe domestic market until the early 2000’s because of the relatively small size of thedomestic market in comparison to the export market. However, quite a few havebecome interested in supplying the domestic markets and have started producing

9

For a detailed account of this domestic subcontracting system, see Goto (2011).

17

in-house designed, branded items for the local market. As table 5 depicts, wage levels atdomestic original brand suppliers has been the highest among the four different suppliercategories, and it is possible that they have been able to capture the “soft dollars” asmentioned earlier, which in turn would work as a strong pull factor drawing in export
suppliers into this market segment. However it should also be noted that there might bea significant difference in market conditions between export and domestic, where theformer being much more competitive compared to the latter.
While export-oriented suppliers are much more advanced in terms of
production technology, they lag behind in the more knowledge-intensive functions
outside the CMT operation due to lack of experience. Figure 4 is a “garment smilingcurve”, which describes the key functions in garment production and the associatedrelative value added along the process. The “product, design and branding” function andthe “distribution and marketing” function are where market risks are mostly
concentrated, and they are high value-added activities. They require knowledge that is
intangible where experience becomes important. In contrast, the CMT function is lowest
in terms of knowledge requirements and value added. The export suppliers and thedomestic subcontractors have been engaged in this low value-added, relatively simple
functional process.
The key functions in the marketing and distribution section embed significant
risks that are primarily related to market uncertainty stemming from demand volatility.
For instance, high levels of originality in product specification (design and materials
used) that attract strong customer brand loyalty can differentiate products and avoid
cost-based competition. On the other hand, when products with such distinctive
specifications fail to attract consumer demand, they will become more difficult to sell
and turn into non-performing inventory, which is very costly and results in significant
loss. Suppliers catering primarily to the CMT functions face no such risks (Goto 2007).
As such, one of the main challenges for export-oriented suppliers in moving up into
these higher value-added functions lies in how to manage such uncertainties.
It should be noted, however, that the value added according to difference infunctions are most likely different in relative terms, conditional to market orientation.
For example, functions related to product specifications are of relatively higher
value-added than the CMT function within the production flow serving the domestic
18

market, while it is difficult to compare that with the level of value-addition of a CMT
function for the export oriented industry. As normally the quality requirements are more
stringent for export oriented businesses than those for the local ones, it may well be thecase that in fact a CMT function for the export market may embed more knowledge
intensive functions and are therefore of higher value-added than the productspecification functions for the local market (export premium).

Figure 4. The Garment Smiling Curve: Functional hierarchy in the garment production-distribution flow
Value
added

Export oriented smiling curve

Exportpremium

Product design andbranding

Distribution andmarketingForeignbuyers

Sourcing andprocurement of
input materials

Product design andbranding

Assembly: Cut, Make
and Trim

Distribution andmarketingVietnamese
suppliers

Sourcing andprocurement of
input materials
Assembly: Cut, Make
and Trim

Domestic oriented smiling curve

Processflow
Source: Modified from Mudambi (2007) and Goto (2006 and 2011).

4 Case Studies: Market Orientation and Differences in Functions
This section will describe three cases involving domestic original brand suppliers whichhave been successful in functional upgrading, followed with a discussion.

4.1 Case 1: Company A (domestic original brand supplier)Company A was established in 1993 with about 30 workers and is headquartered in Ho
Chi Minh City (HCMC). Before establishing the company, the president (Mr. N)
worked for a knitted fabric manufacturing company and accumulated knowledge and19skills related to knitting and garment manufacturing. The total number of workers at
Company A was 300 in 2011, of which 250 were line operators. It currently owns 14
retail shops which are located in HCMC, Da Nang and Can Tho.
Company A produces both knitted and woven fabric-based garments (50:50). In
1993, it started catering solely to the domestic market. Initially its operation was closer
to that of a tailor, in that it produced products based on customers’ specifications. The
company started exporting on a CMT basis in 2007 mainly for the EU and some to theJapanese market, and it currently exports about 30 percent of all production. It
attempted exporting under an FOB contract;10 however, this did not succeed, and thecompany is now solely CMT based.
Its production is based on a PBS, and each production line includes about 20
operators. The average wage for an operator in 2011 was VND3 million (about US$150),
and most workers are not from HCMC but from rural areas, particularly from the central
region such as Nghe An Province. Most of the workers are in their thirties, and only few
leave the company. However, as costs including wages and rental rates in HCMC are
increasing very rapidly, Company A is now constructing a new plant in Long An
Province with a view to relocating part or all of its production operation. Wage levels inLong An Province are lower than those in HCMC, but the supply of skilled workers islimited, which will present a bottleneck to expanding the supply capacity of thecompany in the future.
In terms of productivity, an average sewing operator produces about fivegarments (long-sleeve, standard woven men’s shirt) per day. 11 There were no
significant channels of technology transfer until the company started producing for the
EU and the Japanese markets. While patterns and markers for domestic-oriented
production are produced in-house, those for export are normally provided by buyers.
Production for the export market requires higher levels of quality control and is moredemanding.
10

An FOB (Free on Board) contract is a production modality where suppliers purchase input
materials and thus payments include material costs. The FOB-type export is often regarded as having
higher functionality and thus of high value added; however, as most of the fabrics and other input
materials have been pre-selected and designated by buyers, in terms of functional contents it is often
not substantially different from a CMT-based contract. See Goto (2003) and Goto (2007) for a
detailed discussion on this.
11
Calculation based on 30,000 pieces per month with 250 operators and 25 operating days.

20In-house design and specification of domestic products are undertaken by
designers who have graduated from design schools. As most of the products are soldthrough their own retail shops, designers and merchandisers actively seek feedback
from the retail end on market information related to products and consumer preferences.
This information is continuously used for the planning of product lines.

4.2 Case 2: Company B (domestic original brand supplier)Company B was established in 1995 and its headquarters is located in HCMC. Prior to
the establishment of this company, the president formerly operated a washing factoryfor denim cloths, and the experience he gained through this business was highly helpful
in the production of garments.
Company B owns 10 production plants, of which 6 are in HCMC, 2 in Ben Tre,and 2 in Da Nang. The company is planning to further expand its production capacity by
upgrading its Da Nang plant. These 10 plants employ a total of 2,000 workers, and eachplant is relatively small with about 200 workers. The majority of the production isundertaken in-house, as quality control and monitoring of sub-contractors’ operations isdifficult and time consuming. However, some of the simple and low value-added
products are outsourced to small and micro garment suppliers on a piece-rate basis.
Productivity in terms of output per operator varies according to the plant; the output per
operator for high productivity plants (HCMC) is normally more than 10, while that for
the less productive ones (Ben Tre and Da Nang) is somewhere between 5 and 7. PBS is
the shop-floor production technology that is used in all plants.
Company B initially catered mainly to the export market (EU and eastern
Europe), and it was not until 2002 that it started producing garments for the domestic
market. Export businesses were coordinated by agents from Hong Kong and theoverseas Vietnamese (Viet Kieu), and there was almost no technology transfer fromthese buyers. In 2011, almost all of Company B’s products are for the domestic market,
and just under 5 percent are for the export market. The company president prefers tocontinue focusing on the domestic-oriented businesses as this market is more profitable
and is growing at a rate higher than 20 percent per annum.
All of the company’s domestic-oriented products are distributed through its
own retail stores. The number of retail stores has been expanding rapidly, with about 40
21

in 2006, 100 in 2009 and over 130 in 2011 (32 in HCMC, 21 in Hanoi and the northern
region, 34 in the western region, 25 in the eastern and middle regions, and 21 in the
Mekong delta region). As there are no local logistic service companies in Vietnam, thedistribution of garments from plants to retail shops and between retails shops is directly
undertaken by the supplier, Company B, with its own trucks.
The wage rate of an average operator in a plant in HCMC is about VND3
million (US$150). Wages for designers and merchandisers are higher, normally above
VND5 million. Average wages in Da Nang and Ben Tre are lower by about 15 to 20
percent. Since the labor market in HCMC has become very competitive, the company
has to continuously keep its wage levels comparable to the wages in other sectors;
otherwise, the workers will quickly move to other companies or industries. Workers in
Da Nang and Ben Tre are less mobile.
Company B currently runs six product lines, with different brand names. Whenit started producing in-house designed products in 2002, it recruited an Italian chief
designer, who has been very valuable in establishing the current brand image. Currently
all the designing and marketing functions are undertaken by Vietnamese merchandisers.
As a long term strategy, Company B is considering exporting original brandgarments to neighboring countries including Cambodia and Laos, and eventually toThailand and Singapore. However, its current focus is on the domestic market as
demand growth has been robust and highly profitable.

4.3 Case C: Company C (export supplier)
Established in 1973, Company C is one of the largest and most competitive garment
suppliers in Vietnam, and it formerly belonged to the state-owned Vietnam National
Textile and Garment Corporation (VINATEX). It has been equitized and now is
officially a joint stock company.12
Company C is a typical export-oriented SOE, catering to Vietnam’s traditional
exports markets including the US, EU and the Japanese market. This is one of the first
SOEs that started exporting in the early 1990s with significant government support.
Regarding its contractual modality, 80 percent of its output is produced based on a CMT
12

Even after equitization, it is quite common for the government (or VINATEX) to still own the
majority of shares, with the rest owned by its employees.

22contract, and the remaining 20 percent on an FOB contract. However, as almost all
FOB-based production uses inputs which are designated by foreign buyers, in terms offunctional contents this is almost equivalent to the CMT modality (Goto 2007). While
the majority of its production is export-oriented, it nevertheless has catered a small
portion (1-2%) of its production to the domestic market since 1988. Most of theseproducts were residuals or defective items from an export order and were sold in theirown retail outlets in major cities or through wholesalers/retailers with which Company
C had distributorship agreements.
Company C’s headquarters is located in HCMC, and the total number ofworkers is about 20,000, of which 6,000 are workers in 100 percent owned plants and14,000 in joint venture plants. The average wage of an operator is about VND4 million(US$200); however, this varies according to skill level.
There has been a significant increase in productivity in terms of physical output
per worker (operation-based physical output); in the case of a standard long-sleevemen’s shirt, an average operator produced 35 to 40 shirts per day, which is the highest
average in Vietnam. For some of the high value-added woven shirt production lines, thecompany has introduced the UPS (unit production system), which has further
contributed to boosting productivity. Much of this process and product upgrading
happened through production lines for the Japanese market. There is currently one
resident Japanese technical adviser for the men’s suit product line. There is a clear
difference in the quality requirements in the Japanese and the US markets; the CMT fora suit for the US market is around US$8.5 while that for the Japanese market is US$13.
This difference stems from (1) larger orders for US market per style, and (2) more
complicated specifications for Japanese orders. However, as it has become increasingly
difficult to expand its operation and secure workers, Company C is planning toeventually shift its production functions to the middle region, around Da Nang.
As described earlier, Company C has been distributing and selling part of its
export-oriented products to the domestic market; however, its main focus has been on
the export businesses. This changed in 2008 as the management decided to actively
pursue production and distribution for the domestic market. Because Company C had
failed in the past with its in-house designed businesses and was left with a large amountof inventory, the company recruited several foreign designers, including a German23designer for its domestic men’s suit and a Swiss designer for the woven shirt productionlines. The company’s current share of the domestic market is 12 percent (turnover base),
and it is expected that this share will increase.
Nevertheless, Ms. D., chairwoman of Company C, notes that it is much easierto undertake CMT-based production for export because producing for the domestic
market requires, in addition to the CMT function, different types of unconventional
functions, particularly in design and marketing, in which Company C has only limited
experience.

4.4 Discussion
The above-mentioned cases featuring two successful domestic original brand suppliers(A and B) and a competitive export supplier (C) highlight interesting attributes ofdifferent firm types. One of the characteristics that divide these two types is observed intheir levels of operational-based physical productivity. While it is quite common to finddomestic original brand suppliers utilizing an individual tailoring system, both A and B
have a large number of workers and have been applying PBS. Export Supplier C mainly
operates with PBS and some of its most advanced lines are equipped with a UPS.
Despite the fact that PBS is the dominant production system used, thisoperational-based physical productivity level varies significantly in terms of thephysical output of long-sleeved men’s shirts, at 5 to 10 for a domestic original brandsupplier and 35 to 40 for an export supplier. Neither domestic original brand supplier
had received any technological transfer in the past.
Workers’ wages have been slightly higher at Supplier C; however, in generalthe difference among these two types of firms is not as evident as these cases may
suggest; they seem to be determined more based on suppliers’ performance.
It is interesting to note that both companies A and B found it difficult to copewith CMT-based export businesses while Company C found a CMT-based contract
much easier compared to the domestic market-oriented business where a full-package
operation by the supplier was required. Both of the domestic original garment suppliers
found it difficult to comply with foreign buyers’ requirements for quality, as transfer oftechnology and knowledge from their buyers was limited. Both have stagnated in termsof upgrading in process and products.
24

On the other hand, Company C has been attempting to change its businessportfolio and produce more for the domestic market, but it was struggling to undertakethe necessary functions that are knowledge intensive. For instance, materializing market
information into product specification and design is one such important function.
Collecting and processing raw market information into something intelligible require
skills that are intangible and which are difficult to standardize and write usefully inmanuals. Failure to produce marketable products will result in a much larger loss than afailure in an ordinary CMT operation. To overcome these issues, Company C recruited a
few foreign designers specifically for its domestic market product lines, a strategy
which has been observed in other similar export-oriented suppliers. Acquiring thesetypes of skills requires experience gained primarily through experimentation in local
markets, which is time consuming.
It would be important to note that the difference in market orientation(domestic or export) often play out quite significantly in terms of differences in productquality. Product qualities are determined by both the product specification and the
production process; however, the degree to which the qualities prescribed in thespecifications will be embedded in the actual product is almost entirely dependent on
the technical level of the production process. The production technology of garments issuch that substitutability of labor and capital is very limited, and mechanization of theprocess can only happen to a certain extent. In this context, what determines the qualityof products stems from individual line operator’s skill levels, which are embedded not
in machineries but in humans. These skill set are developed along with market demand,
induced from foreign buyers in the case of the export oriented industry. Accumulation ofsuch skills is also time consuming. Export oriented garment suppliers in Vietnam,
particularly the competitive ones, have, through almost two decades of interaction withthe global value chains, already realized process efficiencies in terms ofoperational-based physical productivity that are among the highest in the world.
While this certainly is impressive, these cases seem to suggest that Vietnam’s
garment industry is at a turning point where it should advance into higher functions withinitiatives originating internally. The next steps that are needed to sustain growth anddevelopment of the industry are much more challenging and different in nature. The
industry will have to explore the possibilities for shifting its focus from the simple CMT25

assembly type functions to more knowledge-intensive ones. Skills in human resources
will become key. Moreover, a common bottleneck for domestic market-oriented
businesses is that Vietnam’s domestic distribution system is still underdeveloped, which
induces suppliers to establish their own retail networks. Division of labor in production
and distribution is absent and is highly integrated, which tends to increase logisticalcosts as economies of scale cannot be achieved. Therefore, economic infrastructure suchas well-functioning distribution systems will be needed to support development on thisfront. These issues are very much in line with the arguments on the “middle incometrap”, which argues that middle income countries such as Vietnam should now shift
from an externally guided development path under which they primarily undertake
simple labor-intensive functions and refocus on how to enhance internal value creation(Ohno 2009).

5 Conclusion
The garment industry of Vietnam was formerly characterized by its duality based onmarket orientation, i.e., export and domestic. Export-oriented garment suppliers weretypically SOEs and foreign-invested firms, while those for the domestic markets were
mostly small, private companies.
Vietnam’s economy has been growing rapidly, particularly since the late 1990s,
and the garment industry has been spearheading this growth as the country’s largest
foreign currency earner in the manufacturing sector. The bilateral trade agreement
signed with the US in December 2001 has further boosted Vietnam's exports, and theindustry has boomed within value chains that are coordinated by foreign buyers.
However, in the latter part of the 2000s, the industry began facing challenges primarily
in terms of labor shortages. Enterprise performance started varying to a significant
extent, and those who were successful in process and product upgrading grew robustly
while those that were not were shrinking and/or getting wiped out of the market. In suchconditions, a few export suppliers started looking into opportunities domestically.
With a booming economy and rapidly increasing income, Vietnam’s domestic
market has become more lucrative. Traditionally, local demand for clothing was met byindividual tailors; however, in the late 1990s, ready-made garments gained popularity.

26

While some domestic demand for ready-made garments was met by imported(smuggled) products from China, domestic private garment suppliers started producing
garments for their local markets, and now there is significant agglomeration of suchsuppliers, particularly in HCMC. Some of the well-known apparel brands haveestablished their own retail stores in major business districts and department stores, notjust in HCMC and Hanoi but in other major cities across Vietnam.
For domestic suppliers, entry of new competitors (export suppliers) into thedomestic market is a threat as they are more advanced in process technology andproduct quality. On the other hand, export suppliers are struggling to upgrade
functionally and move into higher value-added functions which are knowledge
intensive.
Vietnam is no longer a least developed country and has become a “middle-low
income country” according to the World Bank’s classification, and so its domestic
market potential for businesses, especially for commodities such as garments, has
become increasingly attractive. With favorable demographic conditions where therelatively young age groups dominate, business potential in this market will continue torise. In such a context, a major American apparel brand opened two retail shops in Ho
Chi Minh City in November 2011, and another is being planned to open in Hanoi in
2012.13 This trend would be difficult to reverse, and as a result, competition will
increase. Whether Vietnamese garment suppliers can survive and continue to growdepends on their ability to address their bottlenecks in the different areas of upgrading
as well as on whether value is created in the country’s domestic economy.

13

From
http://www.gapinc.com/content/gapinc/html/media/pressrelease/2011/med_pr_VietnamGuam.html,
accessed on February 20, 2012.

27

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～Previous IDE Discussion Papers ～No.

Author(s)Title
Impact of Diagonal Cumulation Rule on FTA Utilization: Evidence
from Bilateral and Multilateral FTAs between Japan and Thailand
Two-Polar Growth Strategy in Myanmar: Seeking "High" and"Balanced" Development

2012

372

Kazunobu HAYAKAWA

371

Toshihiro KUDO and Satoru
KUMAGAI

370

Takeshi Inoue and Shigeyuki Hamori Market Efficiency of Commodity Futures in India

2012

369

Satoru KUMAGAI, Kazunobu
HAYAKAWA, Ikumo ISONO,
Souknilanh KEOLA and Kenmei
TSUBOTA2012

368

Yuya KUDO

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Geographical Simulation Analysis for Logistics Enhancement in Asia

Marriage as Women's Old Age Insurance: Evidence from Migrationand Land Inheritance Practices in Rural Tanzania
Bo MENG, Jinjun XUE, Kuishuang China’s Inter-regional Spillover of Carbon Emissions and Domestic
FENG, Dabao GUAN
Supply Chains
Kazunobu HAYAKAWA
Impacts of FTA Utilization on Firm Performance
Kuo-I CHANG and Kazunobu
Selection and Utilization of the Early Harvest List: Evidence from the
HAYAKAWA
Free Trade Agreement between China and Taiwan
Does the Use of Multiple FTAs Force Firms to Raise Local Input
Kazunobu HAYAKAWA
Share?: Evidence of the Spaghetti Bowl Phenomenon
Firms' Use of FTA Schemes in Exporting and Importing: IsThere a
Kazunobu HAYAKAWA
Two-way Relationship?
Bo MENG, Yong FANG, Norihiko Measuring Global Value Chains and Regional Economic Integration:
YAMANOAn International Input–Output Approach
Tadashi ITO
New Aspects of Intra-industry Trade in EU Countries
Ho Yeon Kim
Shrinking Population and the Urban Hierarchy
Bo MENG, Yaxiong ZHANG,
China’s Regional Economies and Value Chains: An Interregional
Jiemin GUO, Yong FANG
Input-Output Analysis
Real Exchange Rate Appreciation, Resource Boom, and Policy
Koji KUBO
Reform in Myanmar
Increasing Popular Participation in the Treaty-making Process : The
Legislative Process of Section 190 of the 2007 Constitution ofMaki AOKI-OKABE
ThailandTadashi ITO
Revisiting the Determinants of Unit Values
Susumu (Shin) ABE, Ryo
TAKAHASHI, Akiko HARUNA,
Farming Strategy of African Smallholder Fermers in Transition from
Eiji YAMAJI, and Toshiyuki
Traditional to Alternative Agriculture
WAKATSUKI
Kiyoyasu TANAKA and Yoshihiro Spatial Spillovers from FDI Agglomeration: Evidence from the
HASHIGUCHI
Yangtze River Delta in China
Central Bank Intervention and Exchange Rate Behaviour: EmpiricalTakeshi INOUE
Evidence for India
Rajnish KUMAR, Arup MITRA
Toiling Children: The Gender Dimension
and Mayumi MURAYAMA
Casting a Voice for Rural Struggles during Apartheid: The Case of
Chizuko SATO
AFRA
Hisao YOSHINO
Backward-bending of Labor Supply Function and Free Riders
Comparative Analysis of Bilateral Memoranda on Anti-human
Trafficking Cooperation between Thailand and Three Neighboring
Miwa YAMADACountries:
What Do the Origin and the Destination States Agree Upon?
The Inverted Chinese/China Problem in Indonesia: A Preliminary
Nobuhiro AIZAWA
analysis on the 2011 Surabaya incident
Manabu IWAMOTO and Kaoru
Can FDI Promote Export Diversification and Sophistication of Host
NABESHIMACountries? Dynamic Panel System GMM Analysis
Kenmei TSUBOTA
Multiplant Strategy under core-periphery structure

2012

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No.

Author(s)342

Wakana KUSAKA, Michikazu
KOJIMA, Mariko WATANABE
Yuka KODAMA
Etsuyo MICHIDA and Kaoru
NABESHIMA
Shunsuke MANAGI

341

Keiichiro HONDA

340

338

Yasushi HAZAMA
Yoshihiro HASHIGUCHI and
Kuang-hui CHEN
Koichiro KIMURA

337

Mami YAMAGUCHI

336

Junko MIZUNO
Fernando GONZALEZ-VIGIL and
Tatsuya SHIMIZU

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Title
Consciousness, Value and Consumer Choice of Energy Efficient
Appliance: Case of Thailand, China and India
Young Women’s Economic Daily Lives in Rural Ethiopia
Roles of Supply Chains in Adopting Product Related Environmental
Regulations: Case of Vietnam
Trade, Economic Growth and Environment
The Effect of EU Environmental Regulation on International Trade:
Restriction of Hazardous Substances as a Trade Barrier
Non-Economic Voting and Incumbent Strength in Turkey
Assessing Agglomeration Economies in the Yangzi River Delta,
China: A Bayesian Spatial Econometric Approach
Diversified Boundaries of the Firm
Migration as a Rural Development Strategy and the Migrants
Involved: An Account of a Migrants' Hometown in Sichuan, China
Technology Network for Machine Tools in Vietnam
The Japan-Peru FTA: Antecedents, Significance and Main Features

Caste, Land, and Migration: A Preliminary Analysis of a Village
Survey in an Underdeveloped State in India
Progress and Issues in Rural Electrification in Bihar: A Preliminary
Hisaya ODA
Analysis
Development Strategy in Bihar through Revitalizing the Agricultural
Koichi FUJITA
Sector: A Preliminary Analysis
Chirashree Das GUPTA
Growth and Public Finance in Bihar
Zhe Ren
The Confucius Institutes and China’s Soft Power
Coping and Adaptation againsｔ Decreasing Fish Resources:Case
Ikuko OKAMOTO
Study of Fishermen in Lake Inle, Myanmar
Takeshi INOUE, Yuki
Inflation Targeting in Korea, Indonesia, Thailand, and the Philippines:
TOYOSHIMA, and Shigeyuki
The Impact on Business Cycle Synchronization between Each
HAMORICountry and the WorldThe Business Management Strategy of Iran's Large Apparel Firms:
Overview of Results from a Questionnaire Survey and Interviews
Yoko IWASAKI
2009-2011
Koji KUBO
Trade Policies and Trade Mis-reporting in Myanmar
Innovating Global Value Chains: Creation of the Netbook Market by
Momoko KAWAKAMI
Taiwanese Firms
Shawn ARITA and Kiyoyasu
Heterogeneous Multinational Firms and Productivity Gains fromTANAKA
Falling FDI Barriers
Development of Land Rental Market and its Effect on Household
Hisatoshi HOKEN
Farming in Rural China: An Empirical Study in Zhejiang Province
Returns to Migration: The Role of Educational Attainment in Rural
Yuya KUDO
Tanzania
The Gap between Recognition and the ’Compensation Business’: The
Claim against Britain for Compensation by Kenya’s Former Mau Mau
Miwa TSUDAFighters
Restructuring the State Budget System for Disinflation and exchange
Koji KUBO
Rate Unification in Myanmar
Effects of Birth Order and Sibling Sex Composition on Human
Momoe MAKINO
Capital Investment in Children in India
Kazunobu HAYAKAWA, Kiyoyasu Transport Modal Choice by Multinational Firms: Firm-level Evidence
TANAKA, and Yasushi UEKI
from Southeast Asia
Factors that Prevent Children from Gaining Access to Schooling: A
Yuko TSUJITA
Study of Delhi Slum Households
Hiroko UCHIMURA
Health System Reforms in China: Progress and Further Challenges
Production Networks in the Asia-Pacific Region: Facts and Policy
Daisuke HIRATSUKA
Implications
Kaoru NABESHIMA
Growth Strategies in a Greener World
Kazunobu HAYAKAWA, HyunDo Export Promotion Agencies Increase Exports?
Hoon LEE, and Donghyun PARK
Yuko TSUJITA and Hisaya ODA

2012
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No.

Author(s)312

Mariko WATANABE

311

Kazunobu HAYAKAWA
Kazunobu HAYAKAWA andKiyoyasu TANAKA
Kazunobu HAYAKAWA, Fukunari Non-conventional Provisions in Regional Trade Agreements: Do They
Enhance International Trade?
KIMURA, Kaoru NABESHIMA
Concensus and Democracy in Indonesia: Musyawarah-Mufakat
Koichi KAWAMURA
Revisited
Low Workforce Participation of Educated Female and the Role ofKumudinei DISSANAYAKE
Work Organizations in Post-war Sri Lanka
Agricultural Efficiency of Rice Farmers in Myanmar: A Case Study in
Nay Myo Aung
Selected Areas
Establishing Electoral Administration Systems in New Democracies
Takeshi KAWANAKA and Yuki
ASABA
Bilateral Tariff Rates in International Trade: Finished Goods versus
Kazunobu HAYAKAWA
Intermediate Goods
Knowledge Spillover in Indian Automobile Industry
Shuji UCHIKAWA
The Process and the Coverage
Platforms, Network Effects and Small Business Dynamics in China:
Ke DING and Jiutang PAN
Case Study of the Shanzhai Cell Phone Industry
Kazunobu HAYAKAWA and
Location Choice in Low-income Countries: Evidence from Japanese
Kenmei TSUBOTA
Investments in East Asia
The Rise and Fall in the Price of Food, Fuel and Manufactured
Tatsufumi YAMAGATA and Yoko
Goods: Interdependency between Prices and Technology Determining
ASUYAMA
Comparative Advantages and Development Paths
Takeshi INOUE and Shigeyuki
Financial Permeation As a Role of Microfinance: Has Microfinance
HAMORI
Actually been Helpful to the Poor?
Tatsuya SHIMIZU
Development of Broiler Integration in Peru
Kaoru NABESHIMA and Kiyoyasu Innovation Networks among China, Japan, and Korea: Further
TANAKA
Evidence from U.S. Patent Data
Shawn ARITA and Kiyoyasu
Simulating Heterogeneous Multinational Firms
TANAKA
Ramadan School Holidays as a Natural Experiment:Impacts of
Abu S. SHONCHOY and Seiro ITO
Seasonality on School Dropout in Bangladesh
Seasonal Migration and Micro-credit in the Lean Period: Evidence
Abu S. SHONCHOY
from Northwest Bangladesh
Economic Restructuring and Regional Distribution of Enterprises inFutaba ISHIZUKA
Vietnam
Market Discipline by Depositors: Impact of Deposit Insurance on theIndonesian Banking Sector
Miki HAMADA
Market Discipline by Depositors:
Impact of Deposit Insurance on the Indonesian Banking Sector

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Title
Competition of Mechanisms: How Chinese Home Appliances Firms
Coped with Default Risk of Trade Credit?
How Serious Is the Omission of Bilateral Tariff Rates in Gravity?
Export Platform FDI and Firm Heterogeneity

MURAKAMI Kaoru

Negotiating Social Assistance: The Case of the Urban Poor in Turkey

289
288

Kazuhiko OYAMADA and Yoko
UCHIDA
Miwa YAMADA
Yasushi HAZAMA

287

Hisao YOSHINO

286

Natsuko OKA

Domestic, Vertical, and Horizontal Multinationals: A General
Equilibrium Approach using the “Knowledge Capital Model”
Is the Anti-Trafficking Framework Really for the 'Victims'?
Determinants of Political Tolerance: A Literature Review
Strategic Trade Policy and Non-Linear Subsidy -In The Case of Price
CompetitionNeither Exit nor Voice: Loyalty as a Survival Strategy for the Uzbeks
in Kazakhstan

285

Ikuo KUROWA, Kaoru
NABESHIMA, and Kiyoyasu
TANAKA

284

Hitoshi SUZUKI

283

Kozo KUNIMUNE

290

Innovation Networks among China, Japan, and Korea: Evidence fromJapanese Patent Data
Preliminary Discussions on the Urbanization of Rural Areas inModern Iran
A Model of Economic Growth with Saturating Demand

2011
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Author(s)Title

Etsuyo MICHIDA, Cemal Atici, andDoes Quality Matter in the Iron and Scrap Trade?
Michikazu KOJIMA
Kazunobu HAYAKAWA, Fukunari
How Does Country Risk Matter for Foreign Direct Investment?
KIMURA, and Hyun-Hoon LEE
Kazunobu HAYAKAWA and
The Role of Preferential Trade Agreements (PTAs) in Facilitating
Nobuaki YAMASHITA
Global Production Networks
Noriyuki YANAGAWA and Mariko Ex ante barganing and ex post enforcement in trade credit supply:
WATANABE
Theory and Evidence from China
Skill Sorting, Inter-Industry Skill Wage Premium, and Production
Yoko ASUYAMA
Chains: Evidence from India 1999-2000
Skill Distribution and Comparative Advantage: A Comparison of
Yoko ASUYAMA
China and India
Bo MENG, Norihiko YAMANO and Application of Factor Decomposition Techniques to VerticalColin WEBB
Specialisation Measurement
Measuring Fixed Costs for Firms’ Use of a Free Trade Agreement:
Kazunobu HAYAKAWA
Threshold Regression Approach
Myopic or farsighted:
Kenmei TSUBOTA,
Bilateral Trade Agreements among three
Yujiro KAWASAKI
symmetric countries

2011
2011
2011
2011
2011
2011
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2011