The international competitiveness of the Costa Rican clothing industry
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Abstract Costa Rica has become a new centre of international competitiveness in Latin America and the Caribbean. Its share in the imports of the member countries of the Organization for Economic Co-operation and Development (OECD); has gone up from 0.07% to 0.09% (0.15% to 0.23% of the North American market); and in the market for manufactures from 0.01% to 0.04% (0.03% to 0.16% in North America);. Costa Rica's pattern of exports to those markets has varied, with the slow-growing natural resource sector, which accounted for 91.2% of total exports in 1980 (85.2%);, losing ground to fast-growing manufacturing sectors, which made up 38.5% of the total in 1995 (56.6%);. The share of the 10 main export products (at three digits of the Standard International Trade Classification); in total exports came to over 78% (72%);, while clothing become the most important category of the new line of exports, with a 24.5% (37.7%); share of the total. The striking success of the garment industry, however, is threatened by two factors. First, clothing manufacturers in the Caribbean Basin cannot hope to match the advantages Mexico enjoys as a signatory of the North American Free Trade Agreement (NAFTA);. With regard to tariffs, Mexico has a six-point advantage in the United States; many garments it produce are no longer subject to import quotas; and, even more importantly, in order to fulfil minimum content requirements, inputs of Mexican origin are considered as produced within NAFTA. Second, other countries in the Caribbean Basin -such as El Salvador, Guatemala and Honduras- have begun to compete with Costa Rica, on the strength of their lower wages. Together, these two factors have precipitated a drop in garment exports and a decline in the share of some articles in United States imports. In order to study the experiences and competitive situation of garment assemblers in Costa Rica, a total of 16 such firms (12 foreign and 4 local); were surveyed. Particularly revealing and significant were the findings with respect to the interrelationship between the three groups of factors associated with international competitiveness: the global market, corporate strategies and national policy. It has possible to identify the main features of three distinct groups in the sample. As becomes clear, each competitive situation has a certain logic. Group I, consisting of large United States underwear manufacturers, operates in a well-defined competitive situation. In terms of the global market, over a decade ago the parent companies faced a strong challenge from Asian competitors in their domestic market. They responded by setting up manufacturing operations in Latin American countries, which offered them cheap labour and specific incentives (chiefly duty-free import facilities and tax breaks); and preferential access to the United States market (through the HTS 9802 mechanism);. This enabled them to face down the Asian challenge. Underwear exports from the Caribbean Basin, especially Mexico, the Dominican Republic and Costa Rica, increased exponentially, and as a result United States producers were better able to defend their shares in their own market. It is interesting to note that these companies have tended to create more extensive networks by establishing assembly plants in several Caribbean Basin countries, a strategy that gives them the ability to respond to changes in the competitive situation of each cost centre. Each assembly plant is a small part of the overall organization, and with similar operations in various countries the companies can add production lines depending on the efficiency of each individual plant, without having to abandon any particular site, except in extreme circumstances. For these firms, international competitiveness becomes to a large extent an internal matter at the corporate level, and most consider that their main competitors are other United States companies rather than Asian firms. These strategic factors confer security on the integrated production systems of parent firms. They have, in fact, managed to deal successfully with the Asian challenge. This situation is generating significant results in Costa Rica. The underwear industry has become the leading source of garment exports from Costa Rica to the United States. This industry is comprised of three firms established before 1982, along with two others set up in the late 1980s; together, they make up Group I. This group of firms accounts for close to 60% of exports and total employment in the sample. In terms of the number of employees, their operations doubled from 1985 to 1989, and again from 1990 to 1995. Their expansionary corporate strategies were extremely successful. The competitive situation of the four local firms that make up Group III represents the other extreme of the sample. This is a homogeneous group of small and long-established producers of men's and boys' outer garments (SITC 842); and other garments; they operate primarily via export contracts to the United States market, with several categories subject to quotas. These firms were set up as part of the import-substitution industrialization strategy, and, with the policy shift of the 1980s, they lost local market share as a result of import penetration. This forced them to adapt to obtain contracts from foreign buyers, chiefly large department stores or manufacturers of name-brand clothing. They compete with the rest of the world for relatively short contracts, the main determinant of which is price. This group of companies does not enjoy the advantages of the transnational garments firms that assemble in Costa Rica. Unlike foreign companies, the corporate strategies of these firms are based on their competitiveness, rather than global market factors. They tend to adopt defensive positions and have shown mixed results. One of the local firms went bankrupt in 1996. The third competitive situation typifies the remaining foreign firms in the sample. They make up Group II, which is less homogeneous, as it includes new small foreign firms (five from the United States and two from Asia); that produce men's and boys' outer garments (SITC 842); as well as other garments for export to the United States under EPZ or temporary admission arrangements or the Harmonized Tariff Schedule (HTS); 9802 mechanism. Many of the products they export are subject to quotas. Firms in this group are in an intermediate situation that includes elements of both Group I and Group III. As with Group I, firms in this group have a corporate network with many advantages; generally speaking, however, their networks are thinner and more widely extended, and feature larger but less specialized components. They identify their competitors and their competitive situation as the local firms do, i.e., their competitors are other assemblers located in the Caribbean Basin and competition is based either on competitive pricing or defence of their parent companies market share. Their strategies are more focused on cost centres. Five of the seven firms surveyed stressed that the main motive that would induce them to leave Costa Rica would be to reduce labour costs. In addition, an Asian firm that started out by supplying its corporate network in the United States has begun to compete for contracts with large buyers not related to its parent company. Firms in this group are important and account for about 30% of exports and employment in the sample. They did not show the same sort of job growth as firms in Group I; they increased employment by only 50% in the period 1990-1995; however, this was considerably better than in the case of the Group III firms. Three of the seven firms increased their share of the global market in 1990-1995. The export categories that lost the most momentum in 1995 were suits, men's and boys' pants and women's pants. In conclusion, analysis of the successes and challenges of Costa Rica's garment industry was facilitated by the study of the three competitive situations of the different groups of firms operating in that country.