I.

Tendulkar and Bhavani (2003): How far these changes translate themselves into an
expansion in export earnings depends on - (a) the responses of micro-level economic
agents to the changes in policy that have enhanced the profitability of selling in the
external markets relative to that in the domestic market and (b) available opportunities for
exchange in the international markets. In turn, this micro-level response gets reflected in
the directional impact of several firm-level choice variables like technology, scale of
operation and product-mix representing the organisational efficiency apart from the
relative factor prices faced by them. In this context, the present paper proposes to
examine the behaviour of modern small-scale industrial units located in Delhi towards
exports of Textile Garments and Apparel on the basis of the Census of Small Scale
Industrial Units 1 carried out during 1987-88.

One, the study is based on the units located in the same area where the firms may be
expected to face the same input prices and pay the same wage rates so that the observed
inter-firm differences in competitive export markets can be traced to differences in
organisational efficiency as reflected in the firm-level choice variables. Two, firm-level
technical efficiency estimated from stochastic frontier function has been introduced and
found to be significant in explaining export performance. Three, we examine two distinct
aspects of export behaviour of firms, namely, whether to export or sell in the domestic
market leading to export decision function and given this choice, how much to export
giving rise to export performance function. Export performance of any single commodity
is governed by - (a) the character of the government policy regime in the exporting and
importing countries; (b) external demand conditions and (c) supply response in terms of
establishing and maintaining price and quality competitiveness in the external markets. In
this section, we discuss these factors with reference to the Textile Garment and Apparel
Industry.

Pre-1991 trade policy package consisting of overvalued exchange rate and a variety of
high tariff and quantitative restrictions on imports made effective exchange rate for
exporters lower than that for importers; capacity licensig sheltered against internal and
external competition and thus discriminated against exports. The net impact of all these
policies was to enhance the profitability of selling in the domestic market relative to that
in the external markets. Economic policy reforms initiated in July 1991 involved
devaluation of the currency, phased reduction in the peak rate, the average rate as well as
spread of import tariffs, removal of quantitative import restrictions except those on
consumer goods and the removal of industrial licensing except for a short and well-
defined negative list. In addition, government introduced or continued various export
incentives like duty drawbacks and advance licensing. These policy changes created a
favourable environment for exports by raising the profitability of selling in the
international market.

Nurkse (1959) had emphasised external demand as the most binding constraint on exports
from low income countries. This thesis was later challenged by Kravis (1970) who traced
the stagnation in exports of less developed countries primarily to internal supply
constraints. Kravis argument was corroborated by an empirical examination of this issue
for the recent period (1970-87) by Panoutsopoulos (1992). This analysis showed that
although the rate of growth of apparent consumption in volume terms in the major
industrial nations was low, the percentage share of imports especially from the
developing countries in apparent consumption increased over time despite the imposition
of non-tariff barriers in the case of all manufactures including Textile, Clothing and
Footwear. This was traced to the relocation of the corresponding industries away from the
developed countries where labour costs had been rising and toward labour abundant
developing countries. In other words, external markets for Textiles and Clothing though
not expanding very fast, did not appear to pose a constraint on exports from developing
countries.

The foregoing discussion and empirical evidence on rapid growth in garment exports
suggest that neither the volume of external demand nor non-tariff trade barriers like
quotas have affected Indian garment exports in a significant way. So, focus on internal
supply factors that affect the international competitiveness of firms and factors
influencing the inter-firm export performance: economy-level comparative advantage
originating in relative labour productivities (Ricardian formulation) or relative factor
endowments (Heckscher-Ohlin formulation) across countries as a source of potential
competitiveness. Recent theoretical developments emphasise firm level competitive
advantage flowing from technology, product differentiation, imperfect competition and
economies of scale.
Market structure: the selected industry consists of a large number of small firms as the
production of Ready-made garments had till recently been reserved exclusively for the
small scale units. Consequently, most of the garment exports are in the non-branded bulk
export segment where cost-competitiveness is more important than product
differentiation. With no entry or exit barriers except for reservation, the market structure
can, therefore, be taken to be competitive. Hence, considerations relating to imperfect
competition and product differentiation are not relevant in gauging the competitive
advantage at the firm level in this industry.

Scale advantage: An important source of cost competitiveness at the firm level is the
advantage imparted by scale of operation which results in lower average costs. The three
major sources of scale-based advantage are: (a) economies in the production process due
to the presence of increasing returns to scale; (b) economies in the bulk purchases of
materials and (c) economies in marketing and selling costs. In the case of Garments and
Apparel, production process is expected to be scale neutral. There exist, however,
economies in bulk purchase of materials and in the sale of output. Given the fact that the
industry is material intensive (average share of materials in gross output is 0.60),
economies in bulk purchase of materials are expected to be higher, the larger is the scale
of operation. Material intensity also implies higher working capital requirements for
which larger scale enables better access. Overhead marketing costs per unit would also
decline with a rise in sales volume. Since the outlay on materials as well as volume of
sales are directly related to the magnitude of production, we consider the value of
production as a preferred proxy for scale advantage. As the magnitude of production
increases, average costs are expected to fall thereby increasing the firm level
competitiveness and hence exports. We, therefore, expect ceteris paribus, a positive
association between value of production and export intensity.