The Apparel Industry of Sri Lanka

After the liberalization of the economy in 1977 the apparel industry of Sri Lanka has expanded widely. The falling barriers to free trade led the apparel industry to greater prosperity. The garment exporters at East Asian were attracted by the free trade regime and moved their garment businesses to Sri Lanka. However the local entrepreneurs were also motivated to start their own garment businesses. The garment industry plays a major role in the economy as it is one of the largest contributors to the exports revenue compared to the other traditional exports of Sri Lanka such as Tea, Rubber, and Coconut. From the inception garment products were based on imported inputs. In 1992 the Board of Investment (BOI) was established and it provided an incentive package in order to attract garment producers to move to rural areas under the 200 Garment Factory Program (GFP). Kelegama (2005) explains that in 1992 the garment industry was able to become the largest foreign exchange earner in Sri Lanka beating the tea industry. Therefore foreign direct investment has been very remarkable in this sector. Cheap labor and the skilled workforce are the major strengths of the industry that had help the garment industry to gain a competitive advantage. Larger percentage of the industry consists of Small and Medium Enterprises (SMEs). The workers of the industry are well trained and rewarded with social and welfare benefits. One of the significant elements of the industry is it offers employment to around 1/3 of the labor force in the manufacturing sector. In order to develop the skills and the literacy of the employees both the government and private sector have built garment institutes. Some of the brands produced in Sri Lanka include Tommy Hilfiger, Victorias Secretes, and Marks & Spencer etc. One of the major issues the industry had faced was the civil conflict that took place in 1983. Due to the civil conflict most of the foreign investors left the country and many moved to Bangladesh and to other East Asian countries.

The apparel industry has adopted good trade practices from the inception and had offered safe working conditions to its employees and manufactures high quality products. There is a significant growth in the apparel industry of Sri Lanka during past few years. Therefore is it important to enhance the competitiveness of this industry to sustain the stability of the industry and its contribution to the economic growth of the country.

Apparel Industries Growth in terms of Trade Theories

Porters Diamond Model The Porters diamond theory consists of four attributes that helps to create a competitive advantage of a countrys industry. According to Porter the diamond should be favorable for the industry to succeed. Four attributes are as follows, 1. Factor endowments 2. Demand conditions 3. Relating and supporting industries 4. Firm strategy, structure, and rivalry

Factor endowments Hill & Jain (2009) explain that factor endowments are factors of production such as skilled labor, natural resources, infrastructure, technological know-how etc needed to compete in a nations given industry. There are two types of factor endowments. They are basic factors and advanced factors. Basic factors include natural resources, climate, location etc and advanced factors include infrastructure, skilled and sophisticated labor, technology etc. Advanced factors are mainly important for competitive advantage.

With regarding to the apparel industry of Sri Lanka most of the businesses have invested in technology to enhance the productivity. The garments carry out a large inventory of raw materials in order to offer a full package service. One of the main disadvantages of this sector is long lead times compared to the competitors of the region. The lead times can be reduced by forming a strong support base for the industry. The apparel industrys contribution to the export revenue has increased over the last 20 years.

The cheap labor is an important advanced factor of the apparel sector of Sri Lanka. The labor force has been vital to Sri Lankas success in the apparel industry. Therefore cheap labor that is available for the industry has helped to gain a competitive advantage. The necessary raw materials are imported and advanced technology is used to some extent.

With reference to the appendix 1, table 2.7 the textile, wearing apparel and leather products group has grown by 5.2 per cent in 2010 compared to 0.6 per cent in 2009. Although the industry was challenged by high level of competition from regional manufacturers, removal of GSP+ concession and high cost of imported raw materials the industry sustained competitive in exports markets by producing high quality products to western clothing brands (Annual Report of CBSL-2010). The location is an ideal basic factor as Sri Lanka is the islands central, it helps to ship the goods to Europe within a short time period which is less than 16 days under normal conditions. In order to make the apparel industry globally competitive it is important for manufacturers to focus on improving the technology. The apparel industry can enter into upper market segments since there is high potential for the growth of the apparel industry. The skilled, trained and cheap labor factor has helped to improve the competitiveness of the industry.

Demand conditions

Demand conditions mean the nature of the home demand for apparel industrys products and services. Demand conditions influence specific factors of the industry. The demand of the customers has an impact on producing quality and innovative products. According to Porter a nations industry can achieve competitive advantage if the domestic consumers provide early signals of demand to the domestic suppliers. Apparel industry of Sri Lanka is capable of producing in larger quantities. Hence the industry earns profits effectively as there is high demand for garments locally as well as internationally. Demand conditions are based on the countrys level of economy. The efficiency and productivity of the industry can be enhanced by being sensitive to the needs and quantity of demand of the domestic consumers. The major exports markets of garments are USA and UK. The high sophisticated and demanding consumers in USA and UK have made the apparel industry of Sri Lanka globally competitive. The government of Sri Lanka has shaped the domestic demand of the garment sector by introducing 200 garment factory plan and Free Trade Zones.

Related and supporting industries

Hill & Jain (2009) state that relating and supporting industries are the presence or absence of supplier industries and related industries that are internationally competitive. The relating and supporting industries or suppliers are important to an industry. If the supporting industries are competitive, it will make the local industry competitive as well. Unique practices exhibited by the supporting suppliers make the industry competitive and strong. The government policies can influence supporting suppliers. The policies introduced recently have helped to enhance the growth of the apparel industry. The governments development policy framework which is based on the Mahinda Chinthana titled Sri Lanka, the Emerging Wonder of Asia has marked the apparel industrys growth. The withdrawal of GSP+ that took place in August 2010 has not negatively affected the exports as there is a significant increase in export revenues from textile and apparel group. The European and USA clothing retailers have placed a higher number of orders during the last quarter of 2010 (Annual Report of CBSL-2010). Related and supporting industries are vital to gain competitive advantage and improve the knowledge know-how by grouping the related industries.

Firm Strategy, Structure, and Rivalry

An industrys management strategy and structure is important to enhance the competitiveness. Strategy includes the plans of an industry to achieve short run and long run goals. Structure means the industrys work of art and rivalry means the level of competition in the industry. Porter argues that domestic rivalry in a nation will improve the firms efficiency and will make the industry globally competitive. The advantage of locating garments in Export Processing Zones (EPZ) is the physical infrastructure as it was easier for manufacturers to get the labor force. The apparel industry has increased its focus on management skills, high productivity and quality which have increased the growth of the textile, wearing apparel and leather products in 2010. In order to diversify the export destinations the industry has focused on discovering niche markets in the Asian region. The new innovative strategies of the

apparel industry consisted the launching of Re-Engineered Design (RED) products by using waste fabric of local apparel industries, up-cycling and changing them into fashionable clothing line catering to western clothing brands. Source: (Annual Report of CBSL-2009) Therefore the domestic and international rivalry motivates the industry to innovate, improve quality and to invest in improving the advanced factors.

The analysis of the Porters diamond theory in terms of Sri Lankas Apparel industry explains that all four components are favourable in terms of the apparel industry. As a result apparel industry contributes to the export revenue of Sri Lanka.

The Absolute Advantage Theory

Hill & Jain (2009) explain that a country should specialize in producing a product that has an absolute advantage in producing it than any other country. Therefore according to Smith the country that has an absolute advantage in production of a good will be more efficient in producing than other countries. With regarding to the apparel industry of Sri Lanka, it has the absolute advantage of producing garments. Therefore Sri Lanka should specialize in producing garments. Saudi Arabia has the absolute advantage of producing oil. Therefore Sri Lanka can export garments to Saudi Arabia and buy oil in exchange. Similarly Saudi Arabia can export oil to Sri Lanka and buy garments in exchange. Therefore Sri Lanka has an absolute advantage over Saudi Arabia in subject of garments.

The Comparative Advantage Theory

Hill & Jain (2009) state that according to Ricardos theory of comparative advantage, it makes sense that for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

Therefore according to this theory even though a country is efficient in producing two or more products it should specialize in producing the product that it could produce most efficiently. Sri Lanka and USA are efficient in producing both garments and transport equipment. However due to the advancement in technology USA has a comparative advantage in producing vehicles and Sri Lanka has a comparative advantage in producing garments due to the cheap labor. Hence Sri Lanka is comparatively more efficient at producing garments than it is at transport equipments. Sri Lanka can produce garments and export to USA and but transport equipments in exchange. With reference to appendix 2, chart 5.2 export earnings from textile and garment category accounted for 41 per cent in 2010. The contribution to the export revenue from the textile and apparel sector is the largest compared to the contribution from other sectors. This explains that Sri Lankas apparel industry has a comparative advantage.

Heckscher-Ohlin Theory According to Ricardos theory comparative advantage occurs due to differences in productivity. Heckscher-Ohlin argues that comparative advantage occurs due to the differences of countrys factor endowments. The HeckscherOhlin theory predicts that countries will export those goods that make intensive use of factors that are