Factors Inﬂuencing Functional Upgrading in the Apparel Industry: Evidence from Romanian Suppliers

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Master thesis

Factors Influencing Functional Upgrading

in the Apparel Industry:

Evidence from Romanian Suppliers

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Abstract

Outsourcing production is a very important aspect not only for the apparel industry, but also for the regional suppliers from less developed countries, such as Romania. Aiming to illustrate the possibilities that Romanian firms have to functional upgrading within the apparel industry, this paper is analyzing three main factors: buyer-supplier relationship, country-level factors and firm-level factors. Also, the Turkish apparel industry is used in comparison with the Romanian one due to its’ successful evolution. The research design is single case study, based on semi-structured interviews with four Romanian suppliers, thus emphasizing the Romanian apparel industry from the supplier perspective. The findings show that there are several other factors that are influencing the supplier’s decision to upgrade, among which the position in the supply chain, the geographical position within the country, self-financing, industry instability, buyer-supplier relationship stability and the design inputs.

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1. Introduction

The apparel industry is dominated by global players that outsource their production to low-wage countries, creating a complex network of suppliers, spread on multiple tiers. In this study the global commodity chain framework will be used to explain how functional upgrading has taken place for manufacturers in Turkey and how it is influenced by external factors, making it contextual, thus different for countries like Romania. Gereffi, (1999) refers to commodity chain as the whole range of activities that are involved in the design, production and marketing of a product. According to this approach, there are two distinct types of commodity chains: buyer-driven and producer-driven and industrial upgrading involves organizational learning in order to improve a firm’s position in the international trade networks (Gereffi, & Tam, 1998). The buyer-driven commodity chains are encompassing those industries in which large retailers and branded manufacturers are playing a pivotal role in production decentralization, building networks of suppliers that are delivering finished goods according to the buyers’ specifications (Gereffi, 1999). Ergo, a global commodity chain perspective can generate a richer analysis and understanding on how some manufacturers are able to engage in production upgrading and in higher value-added activities.

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4 Higher value activities represent the main competences of the global companies, therefore accumulating sufficient knowledge in order to do that has been possible for only few firms from economies such as Taiwan, Singapore, Hong Kong (Tokatli, 2004). Gereffi (1997, 1999) states that this situation has been possible due to the stable relationship between local assembly manufacturers and lead firms, which evolved over time. According to Humphrey and Schmitz (2002), small manufacturers encounter difficulties in upgrading to higher-value added activities, due to the fact that they are ‘locked-in’ a relationship with one or multiple lead firms (Tokatli, 2004). In scenarios when manufacturers work with multiple global brands, they have to satisfy requirements that may be different and specific for each one of them. Also, the urgent and sometimes unexpected orders can challenge the supplier in better managing their operational system, but is hindering the suppliers in planning any form of functional upgrading.

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5 upgrading took place in Romania. Several articles have focused on factors that enabled supplier upgrading in Turkey, emphasizing the role played by the government in facilitating a relatively fast growth in the apparel industry and the long-term relationships between the Turkish suppliers and global buyers. In the light of these aspects, this study aims to highlight the aspects that were different in Romania and how it hindered and/or enabled functional upgrading by answering to the following research question:

“What are the factors influencing functional upgrading in the Romanian apparel industry?”

2. Literature Review

2.1. Global Commodity Chain and Upgrading

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6 with the actors’ behavior, highlighting the fact that they are both influenced by the social context in which they are operating (Granovetter, 1985). Although the GPN framework is comprehensive and pays attention to both economic and commercial actors involved, I consider that this approach is a better fit for a social upgrading study, due to its’ focus on workers. The existing literature on global commodity chains and global value chains are largely sharing the same analytical concepts and that both frameworks are focused on the role of lead firms in both governing chains and in strongly influencing the upgrading prospects of the supplier firms (Plank et al., 2012). Taking into consideration the abovementioned factors and, I chose to build this study on the GCC framework due to the buyer-driven characteristic which is highlighting the most important aspects of the apparel industry.

According to Gereffi, (1999a), one of the major hypotheses of the global commodity chain framework is that development towards upgrading requires linking up with one of the global players of the industry, called ‘lead firms’. There are three types of lead firms in the existing literature: retailers, marketers and branded manufacturers (Gereffi, 1997). These lead firms don't necessarily have to be vertically integrated manufacturers, nor do they need to be involved in the production of the finished goods (Giraffe, 1999a). Suppliers that operate in a global network are facing many obstacles when it comes to upgrading into higher value-added activities, as for example design and retailing (Schmitz, & Knorringa, 2000; Humphrey, & Schmitz, 2001, 2002). Such upgrading is more likely, or expected to occur in situations where the relationships between the local supplier and the lead firms have evolved over time (Gereffi, 1997, 1999).

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7 implications for skill development. Firstly, process upgrading, is referring to the changes in the production process, aiming to improve efficiency by substituting capital for labor, thus reducing skilled or unskilled work. Secondly, the product upgrading, which occurs in cases where more advanced types of products are introduced. Most of the times this requires more skilled jobs to make and deliver a product due to its’ enhanced features. The third type of upgrading is the functional one, occurring when firms seek to perform higher value added tasks. In the apparel industry it can be done either via vertical integration, adding new capabilities to the firm, either via specialization, which substitutes a set of activities in favor of another (e.g. moving out of production towards brand marketing and design). Lastly, the chain upgrading, implies shifting to a more technologically advanced production chain which may require a change in the workforce or innovations needed to enter new industries as end markets (Barrientos et al., 2011).

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8 logistics. Lastly, own brand manufacturing (OBM) is the highest form of upgrading since it captures high value segments of the chain and includes all the activities in the above-mentioned categories plus marketing and branding activities (Pickles, 2013).

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9 2.2. Upgrading in the Apparel Industry

The focus in this study will be supplier upgrading in the apparel industry, with an emphasis on Romanian suppliers. Apparel is one of the oldest and largest export industries in the world and most nations are part of the international textile market (Gereffi, 1999). In most of the developing economies, this industry plays an important role in generating economic growth, but it develops differently. In this study, the contextual development of the Romanian apparel industry is studied in comparison with the one in Turkey, which emerged as one of the largest exporters of apparel in the world as it developed full-package capabilities (Neidik, & Gereffi, 2006). In an attempt to examine the value chain dynamics in the Turkish competitive and sustained role, the national institutional environment can’t be overlooked (Neidik, & Gereffi, 2006). Although the globalization played a role in countries shifting from import-substituting industrialization to an export orientated activity, the national policymakers have significant autonomy in several areas, such as rate policies, wage suppression, tax policies and other financial tools that can hold tangible consequences (Whitley, 1999). In the case of Turkey, the manner in which the government implemented these export policies played an important role and led to the emergence of financial capital as a dominant class (Tokatli, 2003). The Turkish government supported export growth by implementing direct export subsidy, tax rebates, export credit schemes and maintained a competitive real exchange rate (Özler et al., 2009) and also by liberalizing many of the country’s product markers, by replacing the rigid exchange rate administration with a flexible regime and balanced the power between industrial and commercial capital in the private sector (Tokatli, 2003). Both the government and the private capital has encouraged and favored the apparel sector due to the abundance of raw materials in Turkey, for the production of natural and synthetic fibers (Neidik, & Gereffi, 2006).

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10 followed by design and brand marketing. Several Turkish manufacturers developed impressively and created their own brand. For example, Erak Clothing Inc. started (1984) as manufacturing jeans for lead firms and ended up creating its own brand Mavi Jeans (Tokatli, 2003). The brand is sold worldwide through large retailer department stores (Nordstrom, Macy's, and Bloomingdale) and few directly owned flagship stores (Tokatli, & Kizilgün, 2003).

In an attempt to track down the means through which upgrading was possible and maintained along the years in Turkey, Tokatli, (2003) highlights two developments. First of all, some manufacturers acquired autonomy and know-how that allowed them to emerge as brand-name manufacturers competing globally. Second of all, domestic manufacturers have shifted gradually from industrial capital to commercial and financial capital. Scott, (2002) also mentions that the development of quick-response systems is one of the important reasons for which Turkey was able to accelerate the circulation of products. Thus, the clothing industry was operating in a dense network of both domestic and foreign firms, bounded through contracting and subcontracting agreements (Scott, 2002). As Turkish manufacturing firms were gaining more know-how and technological advanced, they became more autonomous. This fact allowed them to develop and practice their own strategies, upgrading their operations and finally, evolving into global competitors (Tokatli, 2003).

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11 knowledge exchange which is facilitating upgrading in technologies, quality and skills. The manufacturers collaborating with the Italian brands are located in the North-West areas such as Timişoara, Sibiu, Botoşani, Bacãu that are now more advanced in skills and know-how then the rest of the country. In this respect, another study written by Isbaşoiu, (2006) investigated how industrial clusters influenced the regional economic development and how issues such as production delocalization enabled cluster development, by comparing two clusters: Montebelluna and Timişoara. He also highlights the link between Romanian and Italian apparel industries, calling Timisoara “the eight province of Veneto”, due to the fact that a large number of Italian firms were de-locating their production activities to the Romanian region. More than 17,000 Italian companies were registered in the Romanian market by 2005, which coincides with the peak year of the apparel industry in Romania.

A more recent study by Plank and Staritz (2014) is looking into the Romanian apparel sector by analyzing the influence that the EU trade agreements, global economic crisis and the Romanian institutional and policy context had on the up and downgrading of Romanian firms. This study however aims to look into the functional upgrading possibilities that Romanian firms have, considering the relationship between the buyer and supplier, the institutional-level factors and the firm capabilities, from the supplier perspective. Also, the aforementioned articles are discussing the Romanian apparel industry from a broader perspective, whereas this study is looking into specific characteristics, backed upon reliable information gathered from within the industry.

2.3. Determinants for upgrading

2.3.1. Buyer-Supplier Relationship Factors

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12 several supplier- and product related factors and the financial performance of a lead-firm, more precisely, the apparel retailer. Other studies analyzed the relationship quality, emphasizing factors that are influencing it, such as the importance of trust (Crosby et al., 1990; Mohr, & Spekman, 1994), coordination (Mohr, & Spekman, 1994; Naude, & Buttle, 2000), communication (Mohr, & Spekman, 1994), power (Anderson, & Narus, 1984) and many others. The upgrading process is affecting also the buyer in terms of the possibility that the supplier will have the possibility to go global and end up being a competitor. In this respect, Whitford (2001, 43) wrote, that if developing countries continue to develop their skills and if they manage to entry the fashion-conscious markets, then they would become a pressing challenge (recited from Tokatli, & Eldener, 2004).

In this study, I identify the following factors as the main influence of the relationship between buyer and supplier: power asymmetry, distance and buyer assistance. I have chosen these factors because I am not only looking at what might influence the relationship between the buyer-supplier itself, but rather on the implications this relationship is having on the functional upgrading. The importance of these determinants will be emphasized in the following sections.

Power Asymmetry

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13 real rents (Tokalti, 2007) or when the lead firm is making sure that it doesn’t give the means to the supplier to gain the know-how necessary to become a possible competitor. According to Gereffi, (1999) the most value adding activities are not in the manufacturing per se, but in the design, branding and marketing of the products. Thus, the global retailers own the power regarding how the relationship between them and the suppliers is coordinated. Mortimore (2002) also states that supplier firms end up being locked-in the manufacturing activities, so the real rents would be collected only by the lead firms. This aspect leads to an issue in the apparel industry, in terms of the dominance that lead-firms are having towards the suppliers by controlling their degree of knowledge sharing, gaining know-how and innovation, making the interactions between suppliers limited and so are their chances to grow and internationalize.

Distance

The distance between buyer and supplier can encompass three dimensions: geographical, cultural and organizational (Awaysheh, & Klassen, 2010). Hofstede, (1980) states that cultural distance is emphasizing the differences that exist between cultures in which firms are operating and according to Reynolds et al., (2003) cultural distance is influencing the relationship between firms. Situations in which the lead firm and the supplier are from a similar cultural background are easier to manage because discussions about expectations and possible changes are believed to be more straightforward and because regulatory frameworks are more likely to be similar (Awaysheh, & Klassen, 2010). If both supplier and buyer can relate in terms of cultural aspects, organizational learning could happen more quickly and the supplier can increase its’ autonomy, step that could lead towards functional upgrading.

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14 regarding operational procedures and material specification (Awaysheh, & Klassen, 2010). Also, the higher the organizational distance is, the higher the total transactions will be across the supply chain (Williamson, 1979), thus the supplier would not get the inputs directly from the buyer, but from intermediaries which can make the assimilation of knowledge slower and more difficult.

In addition to the factors presented above, Jung Choo et al. (2009) are discussing the geographical proximity of the trading partner, which is seen as a key factor contributing to the success and stability of the relationship, not only due to faster transactions, but also for an easier communication. In this regard, Arbuthnot (1997) found that small fashion retailers in US were experiencing difficulties such as incomplete orders, late shipments and shipping overcharges. Also, the importance of geographical proximity is seen in the business model of fashion retailer Zara, which in 2001, chose to spend 15% more than its’ rivals did in China, in order to produce in Spain and Portugal (Tokatli, 2007). By doing so, higher labor costs were compensated by reduced advertising and inventory costs, and more importantly, shorter lead times (Ferdows et al., 2004) which enabled Zara to deliver new items in stores every two weeks and be flexible with the customer’s demands (Tokatli, 2007).

Buyer Assistance

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15 knowledge sharing routines, which is a regular pattern of interactions that is allowing the exchange of specialized knowledge (Dyer & Singh, 1998).

Akbar and Ferencikova, (2007) found that the technology transfer between buyer and supplier is relatively small and more than half of their sample of suppliers reported no technology transfer from the buyer at all. This is an important issue, since the technology transfer that can increase productivity, combined with the knowledge on how to use this technology, could have high implications in the upgrading decision. In a long-term relationship, several factors are considered important from the supplier’s perspective. Anderson and Narus, (1984) found that communication was important for both formal and informal sharing of technology and information due to the fact that it fosters understanding and trust between transaction parties. In this scenario, technological transfer could happen based on the needs of both supplier and buyer and can generate more rents on the long run. 2.3.2. Firm-Level Factors

Suppliers’ capabilities

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16 Strong ties with a buyer enhances commitment and mutual trust, but it can also pose as an impediment to the supplier’s upgrading towards design and new brand activities. From the supplier’s perspective, trying to meet the expectations of over 30 global buyers, such as JC Penny, and for retailers like Zara and H&M, makes it difficult to focus on upgrading and to break out of a lock-in situation (Jung Choo et al., 2009). Considering the possible urgent orders and the different specifications that each buyer has, the supplier might find it difficult to focus on functional upgrading, when the first concern is satisfying the buyer’s needs. 2.3.3. Institutional-Level Factors

The institutional framework is mainly encompassing the conditions under which market access and information control may provide indirect access for small players to markets, technologies and knowledge (Giraffe, 1999a).

Financial Markets

The financial sector has an important role in facilitating the reallocation of funds among agents, more specifically from agents (individuals) with an excess of capital towards agents (firms) with a shortage of funds (Rajang, & Zing ales, 1996). Access to finance is a factor that is strongly dependent on the financial market within a country, and vice versa (Rupeika-Apoga, 2014). In the Euro area, it ranks second in a most pressing problems faced by SMEs (ECB, 2011) and its impact has been emphasized in several academic studies, since it comes as an obstacle in upgrading and thus, hinders growth, particularly for the SMEs (Peachey, 2004).

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17 limited in accessing funds from other sources (Kashyap, & Stein, 1994).

Abor et al., (2014) conducted a study which emphasized the degree to which access to finance can affect a firm’s exporting activities. The findings suggest that the access to finance of a SME is a critical point in supplying for the high fixed costs that exporting entails. These high costs are originating from international marketing and branding activities meeting higher quality standards required for the production destined overseas, short lead times and good coordination systems. According to Greenaway et al. (2005), finance is a determinant of firms’ participation in the export activities. When entering foreign markets, expenses such as gathering information on the market in question, product upgrading that matches the international standards and marketing channels are crucial and must be covered by either internal or external financial sources (Abor et al., 2014).

Role of the government

The perspective of comparative advantage is arguing that government policies are playing a major role in shaping the location of apparel export activities (Gereffi, & Memedovic, 2003). Pressures such as labor shortages, high wages, currency revaluation, tariffs and quotas can lead to internalization of production, which brings many changes in the industry development (Gereffi, & Memedovic, 2003).

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18 in other industries as well (Czaban, & Henderson, 2003; Dolan, & Tawari, 2001; Rothstein, 2005). An export-orientated country enhances the exposure of domestic firms to the global markets. Therefore small firms improve through functional upgrading, due to the competitive and highly technological environment, which challenges them to move into higher value-added stages (Schmitz, & Knorringa, 2000).

Labor Market

The apparel industry is characterized by labor-intensive activities, thus the availability of a rich labor market is crucial. Labor market can provide high gross margins with both skill-intensive activities such as product design, quality control, packing and labor-skill-intensive such as cutting, trimming, sample making and so on (Gereffi, & Memedovic, 2003). Due to the presence of a very important ‘textile’ polytechnic in Iasi and a large supply of female workers, which were specialized in clothing and footwear production, Romania was a feasible option for producers from Italy or Germany to produce in a low-waged qualified workers environment (Crestanello, & Tattara, 2011). Before the fall of Ceauseşcu regime, Romania had a blooming footwear production industry with large firms like Filty and Gubam, thus creating a canvas of qualified skilled workers or others that could be easily trained.

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3. Methodology

A qualitative research approach is one that examines the concepts by their meaning giving interpretation in specific contexts (Ketokivi & Choi, 2014). Case research can be used as a theory generation method (Ketokivi, & Choi, 2014) either as a single or multiple case study research (Yin, 1989). Building upon Yin’s work, a case study is defined as an empirical inquiry that investigates in depth a phenomenon and within its real-world context. For this paper I am using the single case study approach as a research method in order to provide an in-depth description of the apparel industry in Romania developed, in comparison with the Turkish industry. In this respect, I looked at several factors that are believed to have an effect on functional upgrading: the relationship between buyer and supplier, firm-level factors and institutional environment.

When conducting research, the general aim is to confront the existing theory with the empirical world (Dubois, & Gadde, 2002). Blaikie (1993) introduced the concept of abductive research strategy (ARS) and defined it as generating facts from actors in social life. For this type of research, motives and accounts of the actors involved are emphasized and the general aim is to develop theories that are based on everyday activities (Ong, 2012). Also, this study is exploratory structure due to the fact that the proposed factors are explored within the case study, and context dependent since the Romanian’s evolution had different traits from the Turkish one, and there are some country specific factors that played major roles for both countries.

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20 were made during a field trip to Romania. The questions were predetermined and although it was the same set, the order has been modified based upon the flow of the conversation and the researchers’ perception.

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21 Conceptual model

4. Case introduction: The Romanian Apparel Industry

The existing literature in this field suggests that the international fragmentation is mainly driven by differences in factor prices and labor costs (Helg, & Tajoli, 2005). The sourcing changes, which were focused on labor costs, allowed low-wage countries like Romania, to be feasible markets (Begg et al., 2003). Although in mid-1990s Romania was the second most important exporter in the ECE countries, the industry development occurred much later than in Turkey. By 1990s, some Turkish manufacturers already shifted from assembly to full-package production, increasing their quality standards and delivery time, and later on to brand-name manufacturing, allowing them to collect more rents (Gereffi, 1997; Mortimore, 2002). This aspect has allowed Turkish manufacturers to gain growth and influence in the global markets.

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22 things better’ by moving to higher value-added activities through functional upgrading (Schmitz, & Knorringa, 2000). In Turkey, some domestic firms engaged in global manufacturing and distribution since 1980s, thus allowing them to gain experience in organizational practices in the global apparel chain. For example Boyner Holding started manufacturing for global firms such as Benetton Group of Companies around 1985 period after which they started to work with more foreign brands (Tokatli, 2003). For Romania the situation was somewhat different due to the Ceauşescu regime, which promoted exports but discouraged imports, hence the apparel production became highly domestically integrated (Plank, & Staritz, 2014). This led to a poor competitive environment on the internal market caused mainly by ineffective sales and unsuccessful marketing activities, ergo remaining poorly exploited in spite of its potential (Avrigeanu, & Anghel, 2012). Also, the internal market holds unfair competition for the domestic products, due to a high level of penetration of foreign ones, which are equal or superior in terms of quality with the Romanian products, but with a very low price policy due to the low purchasing power of the population (Choi et al., 2014).

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23 Turkey had a constant growth.

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24 Romania’s boom in the apparel industry reached its highest level in 2005, when it’s export was accounting for 6% of the total EU-15 clothing imports, but decreased after the Treaty of Accession was signed later that year, which had several implications. First, export revenues decreased, while both labor and utility costs rose, due to policy contexts. Second, the labor market was suffering since almost two million Romanians went to work abroad (Ciutacu, 2006). From the government’s side, there was a lack of will and capacity to ensure the wellbeing of the apparel sector through industrial policies. Since the government support was missing, firms were forced to use internal resources in order to attempt to forms of upgrading (Plank, & Staritz, 2014). It was only in the late 2000s when the government gained interest in the apparel sector and adopted the OHS (Occupational Safety and Health) and CSR (Corporate Social Responsibility) standards (ILO, 2010), while the Turkish government was supporting this industry as mentioned in the previous sections.

5. Results

The Romanian apparel industry has been changing constantly in the past decade, resulting in a poor developed internal market and increasing export activities for small suppliers. Among the sample of this study, only product upgrading took place and a tendency for moving towards full-package production is seen, but none of the four suppliers engaged in functional upgrading. In an attempt to establish which factors are nurturing the suppliers’ functional upgrading, three main factors have been proposed as having an influence: buyer-supplier relationship, country-level factors and buyer-suppliers’ capabilities. The coding process is illustrated in Appendix 4.

5.1. Buyer-Supplier Relationship Factors

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26 In terms of price negotiation, surprisingly supplier A was the least satisfied with little or no negotiation, saying that ‘it is pretty rough’, whereas Supplier C and D stated they can negotiate and Supplier B that the price is negotiated and decided together with the buyer. Since the supplier A is the only one having a direct link with the global buyers, the lack of flexibility when it comes to negotiation may indicate that the lead-firms are more strict and price-orientated than the full-package suppliers. To some extent this aspect can be understood, since the global brands don’t have experience in the production process, whereas the full-package suppliers most probably upgraded from assembly manufacturers, ergo possessing an in-depth understanding on the costs production is entailing.

The degree to which the power asymmetry manifests for each supplier is different, supplier A and B being confident that the level of trust built in time and the combination of low-price and good quality they are providing, are balancing the relationship with the foreign customer, supplier B stating that ‘It is easier for us to find new buyers than for them to change suppliers because they trust us’. For supplier C and D however, the buyer seems to have a more dominant presence, being emphasized by the statement of supplier D which said: ‘the buyer is not concerned with our technological equipment, but we have to adapt to their requirements’.

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27 5.2. Country-Level Factors

The government role is found as having a negative influence on the activity of all four suppliers, with taxes that are already high and still increasing and no incentives encouraging the suppliers to either expand their current business or start an additional one dealing with higher-value added activities. The supplier A representative was the most sensitive to the subject during the interviews due to the fact that she recently received a fine from the governmental institutions for which in her opinion she would have deserved an a notice. Supplier B stated that there would be no help from the government in moving towards design activities, but just paying double and Supplier C expressed the importance of taxes decrease in order to expand on more valuable activities.

The labor market would be an issue for supplier D, since the four-hundred employees were already hard to find, not only in the city, but also in the near-by areas. Suppliers A, B and C stated that it would be relatively easy, but they would require training from scratch, supplier C believing that the problem is the fact that the area they are operating in is not one with tradition like the ones in Timişoara or Iaşi, where there are and have been apparel clusters. In areas with tradition, know-how is abundant and competition among the existing or new businesses encourages product and functional upgrading. Also, supplier B raised an interesting issue, saying that the problem would not be training, but the fact that employees tend to change their jobs without any grounded reasons, causing many fluctuations in the firm’s management.

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28 down the business development. Supplier C stressed that the self-financing is a better option, but it is slower and dependent on how they manage their resources.

5.3. Firm-Level Factors

The core competencies of the interviewed suppliers are in general quality and cheap labor costs, which can translate into capabilities. Participation the global networks is teaching the suppliers how to increase quality according to the global standards, through product upgrading (Gereffi, 1999). Supplier A considers that the reason the global buyers can’t replace them is in fact the capabilities they possess, such as high quality and speed of their production, stating that: ‘I had no complaints regarding the quality or delivery time. This is the reason we lasted so long on the market’. The more capabilities one supplier is possessing, the more valuable the firm is, fact highlighted by Supplier B, which gained enough knowledge over the years, to propose small interventions when the garments are not fit for mass-production and from the process description, Supplier C is starting to engage in packaging and make arrangements for the shipping process. In terms of improvement all four suppliers highlighted the fact that the quality and competences they have now have increased over the years and perfected based on the collaboration with the buyers, which facilitated the ‘learning by doing’, and the need of new equipment in order to increase productivity.

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29 part, lead-firms of branding and marketing and small businesses like hers take care of all the production. She also mentioned that due to her experience, she would be able to engage in design and logistics, but that she can’t do so in the area she operates now due to the lack of skilled-labor and space. The geographical position is forcing her to bring workers once a week from other cities, to take care of the final details that her workers can’t, which imply extra costs for her. On top of that, supplier B believes the market is hard to penetrate for the time being due to the increasing competition in the field. Finding clients was the main concern for supplier D and too much risk due to the low market demand for Supplier C. 5.4. New Factors

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self-30 financing, due to an unsecure financial market, thus limiting the size of investments and the quickness in upgrading. Having access to finance is important for any small or medium sized manufacturing firm and since there are many requirements due to the dynamic industry, self-financing might not be enough to push the activity towards functional upgrading. In this regard, supplier D stressed the industry instability by saying ‘I don’t know how much is Romania going to last from this perspective, especially the small firms’, which combined with self-financing can be an opulent influence on functional upgrading, since the suppliers might be perceiving the functional upgrading as too risky. According to supplier D, ‘the wages are growing, taxes are growing, but the buyer doesn’t want to pay more for the production’ implying an instable situation.

All four suppliers have stated that their collaboration with the buyer is stable and based on trust. Normally, this relationship stability is seen as a positive factor, but having in mind the functional upgrading, suppliers might find it difficult to engage in other activities as long as the relationship with the buyer is in such good terms. ‘We get along well and we trust each other’, stated supplier A, highlighting a high level of commitment which otherwise might be broken when engaging into full-package and design activities, thus leading to commercial stagnation of the supplier.

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31 upgrading. Supplier A however has the option to change some details of the garments based on professional expertise within the firm, only as long as they inform the buyer and they settle upon an arrangement. The reason behind this option that supplier A has could be because the firm has direct link with the global brands, whereas the other three suppliers have contracts with full-package suppliers that are managing the design and the logistics for the lead-firms, hence positioning Supplier B, C and D in second or lower tier of the supply chain and Supplier A in the first tier. Also, based on the interviews and face-to-face conversations with all four suppliers, I have determined that full-package supplier is perceived differently now than it was in the literature so far, because these companies deal only with design and logistics, subcontracting the entire production. This aspect would leave the lead-firms only responsible with the branding and marketing activities and full-package suppliers separated from the production activities completely.

Other challenges in functional upgrading would be the difficulties encountered in market penetration as a brand, market demand and the dense competition within the apparel industry.

6. Discussion

Grounded on the analysis of both Romanian and Turkish apparel industry and on the results obtained through coding the interviews conducted with the Romanian suppliers, we can easily observe that there were contextual factors that facilitated both industries in different ways.

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32 upgrading plans. Although Tokatli (2007) highlighted the fact that this does not necessarily give complete power to the buyer over the supplier, it leaves little room for improvement in more valuable activities, such as acquiring the raw materials and coordinating logistic activities. Also, the interviewed suppliers highlighted a fear of becoming competitors of the full-package suppliers they are working with, finding opening a new business as a solution, but at the same time considering that perusing both production and design activities is rather difficult. Second of all, the buyer assistance is acknowledged by all suppliers as having an effect on the increase of their product quality and operational management via know-how transfer, as Dyer and Hatch, (2006) stated that it can nurture relation-specific production capabilities of the supplier. Regardless of the limited input the suppliers are having on design matters, ‘learning by doing’ has facilitated them to gain knowledge and to feel confident that they could engage in this type of activities if needed, due to the technological and operational practices that translate into inter-firm knowledge sharing routines (Dyer, & Singh, 1998). According to Akbar and Ferencikova, (2007) almost half of their sample of suppliers reported little or no technological transfer between them and the global buyer, fact that is confirmed by this study, with only one supplier being confident that it would receive support in this matter. Lastly, it is noticeable that the forms of distance are of importance in facilitating a closer and long-term relationship between the parties involved. Banet, (1976) believed that organizational distance is amplified with the length of the supply chain, fact that is confirmed based on the analysis of my study, since supplier A which has a direct interaction with the global buyer has proved to be most close, satisfied and with most freedom of actions in terms of design.

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33 national institution processes can interfere with the chain dynamics either by providing resources or raising obstacles in the intention of local firms to upgrade or to participate in the global markets. Due to longer timeframe in the industry and the external support, for Turkish manufacturers this transition was easier and learned how to manage both production and full-package services. This study shows that the Romanian government didn’t manage to properly value or encourage the apparel industry, it’s actions enabling both upgrading and downgrading the suppliers’ activities through the OPT agreements and having in general a low level of support for the small businesses. Since the internal market was poorly exploited, delivering products for the global markets was entirely done by Romanian suppliers according to foreign specifications, leaving little or no room for input, therefore none of the four suppliers succeeded in functional upgrading. Also, since financial markets are not supportive for the industry, suppliers have to rely on self-financing, therefore their actions are limited in spite of the existence of skills to upgrade. In terms of labor markets, this appears to be an important challenge for my sample of suppliers, due to their geographical position that limits them in finding skilled personnel for higher value-added activities. In comparison, Turkey was benefitting from an abundant labor market, Özler et al., (2009) finding that the Turkish manufacturers were competitive in terms of technical skill intensive practices.

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34 packaging and shipping, and basic production is subcontracted to suppliers that only deal with low-value added activities such as sewing and trimming. Lead firms are in charge with marketing and branding, thus giving suppliers greater degree of responsibility. In this context, Romanian suppliers consider that stepping into these types of activities require opening a new business, based on the belief that managing both activities simultaneously would be too challenging.

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35 continuous activity, but can also led to their commercial stagnation. Suppliers are satisfied with the fact that the contracts with the buyers are constant, or for some growing, thus don’t feel the need for engaging in upgrading. All these factors, combined with other challenges such as the difficulty of market penetration as a brand, have led the manufacturers to doubt the benefits of full-package production and functional upgrading, perceiving this shift of activities as a very risky move.

An extension to the distance factor would be the fact that the geographical position of the supplier itself matters more than the geographical proximity, since in some areas there is tradition and grounded know-how on crafting within the apparel industry, whereas in other areas such as the ones the interviewed suppliers were operating, there is little expertise and it can be a disadvantage when deciding to peruse functional upgrading. For all four sample suppliers the lack of space and skilled-labor force represented a challenge, thus the need of expanding in a different area was mentioned.

The analysis this study provides shows that upgrading has become more challenging for suppliers, not only due to a need of expanding the range of operations, but also due to the insecurity that the industry brings. A clear limitation for this study is the country-specific context based on which the conclusive ideas are drawn. Due to specific governmental actions and historical reasons, some of the findings in this study may not be applied to another context.

7. Conclusion

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36 the existing orders. Second of all, this study showed that at least one of the four suppliers would be able to engage in design and logistics activities, but the geographical position is not in favor due to the lack of tradition, hence skilled labor force, and lack of available space for a new division. Interestingly, all the suppliers correlate the full-package production with opening a separate firm, highlighting that doing both production and design activities is challenging and hard to accomplish. Third of all, the results demonstrate that having a direct link with the global buyers can be advantageous in terms of technological transfer and occasionally design inputs, but can be unfavorable when it comes to price negotiation and stricter rules about following the specifications. Lastly, I noticed a fear of ending the existing collaborations and engaging in higher value added activities from the supplier side, since the country-level environment is not very supportive and functional upgrading requires overcoming challenges in the suppliers’ capabilities, such as designing, logistics, material and accessories procurement, marketing and network coordination.

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37

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45

Appendix 1

Source: Begg et al., 2003

Appendix 2

Interview guideline:

I want to thank you for taking the time to meet with me today.

My name is Claudia Theodora Moise and I would like to talk to you about your working relations with global buyers. The interview should take less than an hour. All responses will be kept confidential. This means that your interview responses will only be shared with research team members and we will ensure that any information we include in our report does not identify you as the respondent.

Are there any questions about what I have just explained?

Name:__________________________________________________________________ Surname: _______________________________________________________________

Name of the

company:________________________________________________________________ 1. How long have you been in active in the apparel industry?

2. When did you start exporting and where?

3. Do you have a main buyer? If yes, from which country and for how long were you in collaboration?

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46 firms’ development?

6. Do you find it difficult to get financed, either by loans or investors? 7. Is it difficult to find skilled labor force?

8. What changes in the institutional environment do you believe will enable your economic development?

9. What is your core quality?

10. Do you have the necessary skills and knowledge to interpret designs and provide logistics?

11. Do you encounter difficulties in delivering the garments in time and in accordance with the quality standards?

12. How would you describe your relationship with the buyer in terms of stability, knowledge exchange and reliability?

13. How and how often do you communicate? Please mention which communication channel do you find most effective.

14. Do you exchange visits with your contractor? If yes, to what extent do these visits improve your relationship and knowledge transfer?

15. From a technological stand view, is the contractor providing support? How is the process carried out?

16. What aspects would you improve?

17. How easy can the buyer change suppliers? 18. For how long are the contracts signed?

19. To what extent can you negotiate the price with your buyer?

Is there anything more you would like to add?

___________________________________________________________________________ ___________________________________________________________________________

I will be analyzing the information you and others gave me and I’ll be happy to send you a copy to review at that time, if you are interested.

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Appendix 3

Name company Saga Design

S.R.L. Supplier A Plolar Prod S.R.L. Supplier B SC Texital S.R.L. Supplier C Eryn Modamax S.R.L. Supplier D Background of the interviewed person Owner of the manufacturing firm; Previous experience in sales; Owner of the manufacturing firm; Previous experience in the apparel industry, operating in Greece before moving to Romania; Representative of the owner, currently having a general director position within the firm; Previous experience in logistics; Representative of the owner, currently having a general director position within the firm; Previous experience in the apparel industry; Year of founding 2001 1998 2000 2009 Year of exporting 2002 1998 2000 2009 Main Client country of origin

U.K. U.K., Germany

and Romania

Italy Spain, U.K. and

The Netherlands Main clients

name

River Island; Dorothy Perkins

- Textura S.P.A. Inditex, C&A,

River Island Position in the

supply chain

Tier 1 Tier 2 Tier 2 Tier 2

Nr. Employees 88 120 235 400

Main

production line

Shirts, skirts, dresses and pants for women

Classic Men Wear Shirts, dresses and

pants for women Activity

description

Lohn system: The manufacturer receives the materials, the accessories and technical specifications. The products are then finished and sent to the foreign buyer. Changes in the design are allowed when technical details don’t match with the outcome, but the client has to approve.

Lohn system: The manufacturer receives the materials, the accessories and technical specifications. The products are then finished and sent to the foreign buyer. Changes in the design are not allowed.

Lohn system: The manufacturer receives the materials, the accessories and technical specifications. The products are then finished and sent to the foreign buyer. Changes in the design are not allowed

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Appendix 4

Codes Supplier A Quotes Supplier B Quotes Supplier C Quotes Supplier D Quotes

Buyer-Supplier Relationship Factors Buyer Specifications

‘I receive the order, I send a sample to England, if there are any

comments regarding the dimensions and other technical issues they tell me, if not I can start the

production’;

‘They send me the fabrics, accessories and everything I need for the order’

‘All the orders are coming with all technical details, sketches and sewing specifications’

‘We receive everything from the materials to the technical specifications’

‘We must follow the buyer’s specifications’

Technological transfer

‘I think they would help me if I would need a new machinery or how to use it’;

‘A new client in France that I want to work with assured me that I would receive the technology I need in order to be able to do the models they want, because they like our quality’

‘No, it doesn’t work like that’

‘The machineries that we decide to acquire would be from our own financial resources’

‘From the client no. We

manage this on our own’ ‘There is no transfer, we just have to know how to do our job’

Orders ‘Max three weeks’ ‘With 1-3 months in

advance, for 10.000 pieces order’

‘Constantly’ ‘We never take more than we can

produce’;

‘Orders are constant’

Locked-in situation

‘Our production is according to the client we have’

‘We have urgent orders that we have to take care of, even though it messes up all our operational processes’

‘We are fully dependent on our contractor’

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49 Power

Asymmetry

‘We have to follow their instructions’

‘They tried to look for something cheaper, but after they found it they realized the quality was not good, so they are dependent on us too’

‘It is easier for us to find new buyers than for them to change suppliers because they trust us’

‘We must do exactly what the buyer wants’

‘The buyer is not concerned with our technological equipment, but we have to adapt to their

requirements’

‘The workmanship for a product is not that high’

Buyer Assistance

‘I have their support any time’ ‘I have visits form the

buyer in England when I can ask them if I need anything or If I need guidance for some models’

‘If a new order is important and we don’t have the know-how to deliver it, then they are helping us’; ‘There is always

collaboration between us’

‘If a dress has a more difficult model, they give us the operational steps to deliver it’

Communication with the buyer

‘Daily, through e-mail’ ‘Daily on the phone.

Sometimes also visits at the plants’

‘Daily, phone and e-mail’ ‘Daily, phone and e-mail’

Price Negotiation

‘The negotiation is pretty rough’ ‘We are deciding on a

price together’

‘We can negotiate the price’

‘If the price they offer is too low, we can negotiate in relation with the operations needed to deliver that piece […] but not too much’

Geographical Distance

‘It was easy for us to work with England, because it was easier to access them. Also, in our industry it is important to work fast, so shipment from us to the buyer doesn’t take long’

‘We are working with clients from England, Germany and a full-package supplier in Romania’;

‘Client is from Italy’ ‘We work for clients in U.K.,

Spain and The Netherlands’

Cultural Distance

‘Although customers have changed over the years, we had no problem working with any of them. Communication is easy and our procedures are similar’

‘I have clients from different countries, so understanding their way of doing thigs is important for our communication and long-term

relationship’

‘Since the owner is of Italian origin, we never had problems communicating and understanding the way each of us work’