Upgrading and technical efficiency in Kenyan garment firms: does insertion in global value chains matter?

Abstract

In value chains discourse, a widely held proposition is that industrial upgrading (a rapid build up of industrial production capabilities) in developing countries occurs mostly when local producers participate in global value chains (GVCs). It is argued that insertion in GVC is a vital step for industrial upgrading because it puts local firms on a potentially dynamic learning curve. This study explores the validity of this argument by using Kenyan garment data to examine the upgrading potential of firms operating not only within GVC, but also within domestic and regional value chains. To investigate these issues, this thesis combines quantitative and qualitative methods to conduct a systematic comparison of the different types of value chains and corresponding types of upgrading in the garment industry. Data used in this study was collected in 2006 from forty-four (44) medium- and large-scale garment manufacturing firms in Kenya. The survey was supplemented by ten (lO) case studies and 15 key-informant interviews. The garment industry in Kenya has been earmarked for industrial development due to several factors that differentiate it from Kenya' other manufacturing sectors. Unlike traditional agricultural commodities, the garment industry has potential for diversification into export categories with greater value addition. The industry also plays a critical role in employment creation, particularly for low skilled workers, has low capital outlay, and integrates the country into the global trade arena of manufactures. The main finding of this study is that the upgrading potential for firms operating in a value chain is dependent on the nature of governance in that chain. Furthermore, because of the governance in GVC, quasi hierarchical, garment firms in GVC experience extensive process and product upgrading but little functional upgrading. In contrast, functional upgrading for firms operating in market-based chains is high and process and product upgrading moderate. Thus, the findings do not support the widely held perception that upgrading occurs mainly to firms inserted in GVc. Moreover, firms that simultaneously participate in domestic and export (tmulii-chain) value chains demonstrate higher potential upgrading than those specializing in a single value chain. In this case, firms use knowledge and experience gained in the domestic market to launch their own brands in the export market. In addition, the technical efficiency of this industry was estimated using the stochastic frontier analysis (SFA). The SFA results reveal that garment manufacturing firms in Kenya are technically efficient with a mean score of 83 per cent. Moreover, 'export' and 'firm size' variables have a positive and statistically significant effect on technical efficiency in the garment industry. More importantly, firms in multiple value chains have a higher technical efficiency score than the average score for the entire industry. This finding appears to be consistent with the leaning-by exporting hypothesis. Drawing from these findings, the study concludes that the future of the garment industry in Kenya lies in the hands of 'locally owned' firms which depend on market-based trajectories to upgrade. These firms, as our findings suggest should be encouraged to increase their participation in the export markets using their own branded garments. The importance of functional upgrading supported by branding, marketing and design provide firms with strategic options that decrease vulnerability associated in global value chains.