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Upgrading and Competitiveness Within the Export Manufacturing Industry in Central America, Mexico, and the Dominican Republic

2010; Taylor & Francis; Volume: 11; Issue: 1 Linguagem: Inglês

10.1080/10978521003698489

1528-6932

Ramón Padilla-Pérez, René Hernández,

Global Trade and Competitiveness

ABSTRACT The competitiveness of the export manufacturing industry (EMI) in Central America, Mexico, and the Dominican Republic has been significantly eroded by increasing competition from Asian countries in the past decade. This paper examines technological upgrading strategies followed by export-oriented manufacturing firms that operate under various investment attraction and export promotion schemes such as maquila and free zones in order to face the increasing Asian competition. In particular, it aims to study why the strategies followed in the two main sectors of the EMI—electronics and apparel—have had significantly different impacts on export competitiveness. Although the empirical evidence shows that both sectors have mainly followed process upgrading strategies, and to a lesser extent functional and inter-sectoral upgrading, the type of governance of the global value chain, sector-specific characteristics, and corporate strategies help explain their diverging impacts on competitiveness. RESUMEN RESUMEN La competitividad de la industria manufacturera de exportación (IMANE) en Centroamérica, México y República Dominicana ha sufrido un deterioro significativo en la última década debido a la creciente competencia de los países asiáticos. Este estudio analiza las estrategias de escalamiento tecnológico adoptadas por empresas manufactureras orientadas a la exportación, que operan bajo regímenes de atracción de inversiones y promoción de exportaciones como la maquila y zonas francas, con el propósito de enfrentar la cada vez más agresiva competencia asiática. Su principal objetivo es estudiar por qué las estrategias implementadas en los dos principales sectores de la IMANE – electrónica y prendas de vestir – han tenido un impacto considerablemente diferente sobre la competitividad de las exportaciones. La evidencia empírica sugiere que dichos sectores adoptaron principalmente estrategias de escalamiento de proceso y, en menor medida, de escalamiento funcional e intersectorial. Sin embargo, el tipo de gobernabilidad de la cadena global de valor, así como las características sectoriales específicas y estrategias empresariales ayudan a explicar el impacto específico de dichas estrategias sobre la competitividad. RESUMO A competitividade da indústria de produtos de exportação (EMI) na América Central, no México e na República Dominicana sofreu expressiva diminuição em virtude da concorrência crescente exercida por países asiáticos ao longo da última década. Este estudo examina estratégias de melhoria tecnológica adotadas por indústrias de produtos de exportação que operam segundo diversos esquemas de atração de investimento e promoção de exportações, tais como indústrias maquiladoras e zonas francas, a fim de fazer frente à concorrência asiática cada vez mais acirrada. Em particular, seu objetivo é estudar a razão pela qual as estratégias adotadas nos dois principais setores da EMI—produtos eletrônicos e vestuário—produziram um impacto significativamente distinto na competitividade das exportações. A evidência empírica sugere que esses dois setores adotaram principalmente estratégias de melhoria de processo e, em menor medida, as de melhoria funcional e intersetorial. Todavia, o tipo de governança da cadeia global de valor, bem como caracterí-sticas setoriais específicas e estratégias empresariais, ajudam a explicar o impacto divergente produzido na competitividade. KEYWORDS: apparelCentral AmericacompetitivenesselectronicsMexicoupgrading Notes Source: Own preparation. 1 The temporal admission scheme is also known as the regime for active improvement. 2 In 2006, the Mexican government combined the two most important schemes (the maquiladora industry and PITEX, a type of temporal admission program) under the "Industria manufactura, maquiladora y de servicios de exportación" (IMMEX). Source: Own preparation based on official sources. a Preliminary data. b Comprises free zones and temporal admission. c Comprises the maquiladora industry and PITEX. Source: Own preparation based on MAGIC (2007). Source: Own preparation based on MAGIC (2007). Source: Padilla-Perez (Citation2006). The source is MAGIC (2007). Fajnzylber (1990) distinguished between authentic and spurious competitiveness. The former was related to dynamic comparative advantages constructed through investment in human capital, research and development, and infrastructure, among others, while the latter was the result of static comparative advantages associated with geographical location, an abundant labor force, and natural resources. See Padilla et al. (Citation2008) for further details on export promotion schemes in CAM-DR, and Ventura and Duran (2001), Alonso (Citation2002), and Kuwayama and Duran (Citation2003) for an analysis of export promotion schemes in Latin America. In 1965 Mexico launched the Border Industrialisation Programme, which was later on transformed into the maquiladora program (Buitelaar and Padilla, 2000). See Buitelaar, Padilla, and Urrutia (1999) and ILO (1997) for further details on the origin of EMI. See Padilla et al. (Citation2008) for more details on incentives and exemptions granted by export promotion schemes in EMI. See ILO (1997) and Buitelaar, Padilla and Urrutia (1999). The sources of the following data are the National Institute of Statistics, Geography and Informatics (INEGI) and Ministry of Economy in Mexico; the Foreign Trade Corporation of Costa Rica (PROCOMER); the Free Zone Council of the Dominican Republic; the Central Bank in Guatemala; the Central Bank and the Maquiladora Honduran Association in Honduras; the Central Bank and the Free Zones National Commission in Nicaragua; and the Central Bank in El Salvador. DR-CAFTA represents the sum of Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic, all of which signed a free trade agreement with the United States. See Padilla and Martínez (2007) and Hernandez (2007) for further information on trade liberalization, trade preference, and trade growth in CAM-DR. The value chain describes the full range of activities that are needed to bring a product or service from conception, through the intermediary phases of production and to delivery, to final consumption (Kaplinsky, Citation2000). GPNs have been studied in the existing literature and are known under different names. For instance, Sturgeon (Citation2002) calls them "modular production networks," and Ng and Yeats (Citation1999) refer to them as "international production sharing." See Gereffi and Korzeniewicz (Citation1994). More recent research on global production has highlighted other important forms of coordination (see UNIDO, 2004; Gereffi et al., Citation2005). See, for instance, Humphrey and Schmitz (Citation2002) and Giuliani et al. (Citation2005). Humphrey and Schmitz (2002, p. 1020) define product upgrading as "moving into more sophisticated product lines." However, based on this definition, product upgrading does not necessarily involve more-advanced technological capabilities. For instance, the electronics industry in northern Mexico recently moved from analogical or conventional TV sets to digital TV sets (see Carrillo and Hualde, Citation2006). Although the latter are more sophisticated products, the shift did not necessarily involve greater product technological capabilities, since firms in Mexico still focused mainly on assembling final goods. Definition based on The Yearbook of World Electronics Data 2002/2003. There is no single or standard definition of the electronics industry. Its continuous growth and influence on other industries makes it difficult to classify all the products and sectors encompassed by it. Official figures, PROCOMER (Foreign Trade Corporation of Costa Rica). Intel is by far the largest firm, contributing around 25% and 90% of total employment and exports, respectively, of electronics EMI in Costa Rica, but in 2006, there were more than 35 firms that carried out assembling and manufacturing activities, most of them located in the Central Valley around San Jose. (Own estimation based on data of CINDE – Costa Rican Coalition of Development Initiatives.) Official figures, Ministry of Economy. Official figures, CNZF (Free Zone National Council). See UNCTAD (2005). See Padilla-Pérez (Citation2006) for further information. See Padilla-Pérez and Juárez (Citation2006). See ECLAC (2007). For instance, in August 2004 the directors of two industry associations specializing in the electronics industry in Mexico argued that the industry was going through an important transformation toward high mix – low volume processes (see Milenio, Citation2004). Similarly, in November 2003 the president of the National Association of Electronics, Telecommunication and Software Industries (CANIETI) of Mexico stated, in his speech to open their annual meeting, that those firms focused on low and medium volume and high mix had faced better the increasing Asian competition (see CANIETI, 2003). See, for instance, Nieto (Citation2007), Rico Tavera (Citation2009), and Sánchez Proal (Citation2009). See Palacios (Citation2008) and Padilla-Pérez (2005). See Ángeles (Citation2007). Similarly, Carrillo and Hualde (Citation2006); PRODUCEN (Citation2006), and Sánchez Proal (Citation2009) point out the importance of this strategy. Cadena Productiva de la Electrónica, A.C. By the same token, Carrillo and Gomis (Citation2004, Citation2007) argued that some electronics firms operating under the maquiladora program in Mexico have established engineering and design units within their manufacturing plants. Palacios (Citation2008) pointed out that in Jalisco there is an increasing trend among electronics firms to conduct software and hardware design activities. The apparel sector in this study includes chapter 50 through 63 of the Harmonized Tariff System. Chapter 61 corresponds to knitted apparel and chapter 62 to non-knitted or crocheted apparel. The empirical literature and case studies suggest that while Asian countries increasingly specialized in synthetic fibers for the production of "technical textiles," CAM-DR countries maintained the production of natural fibers such as cotton and thus decreased their competitiveness (Hernández, Romero, and Cordero, Citation2006; Hernández, 2007; Hernández, Citation2007b; Gereffi and Korzeniewics, Citation1994; Gereffi and Memedovic, Citation2003), even though the former has not enjoyed the same preferential access to the U.S. market as the latter has since 2000. The source is MAGIC (2007). The use intensity factor varies in all these activities. For example, the production of fibers, yarns, and knits requires intensive use of capital and technology to develop the raw material. This is the link of the chain where most technological progress has been made. It is associated with new types of fabric with specific characteristics (technical fabrics) and designed for different environments (sporting, military, security, medical, and fashion). The assembling and finishing of garments are labor-intensive, while design and marketing are knowledge- and engineering-intensive (Hernández, 2007, Citation2007b). "Full package production" refers to any production arrangement between a client (buyer) and a contractor (manufacturer), in which the contractor is responsible for purchasing the raw materials (for example, yarn or fabric) and coordinating all the different parts of the production process (Bair and Gereffi, Citation2003). The authors would like to thank Martha Cordero and Indira Romero for their participation in the fieldwork. Dussel (2001) and USITC (2004) found similar empirical evidence. Gereffi and Memedovic (2003) and Hernández et al. (Citation2006) reached similar conclusions.