Academic journal article IUP Journal of Applied Economics

Efficiency of Spanish Textile Industry before the Sector's Liberalization

Academic journal article IUP Journal of Applied Economics

Efficiency of Spanish Textile Industry before the Sector's Liberalization

Article excerpt

This paper examines the technical efficiency of the Spanish textile industry for the period 1995-2005, by estimating a stochastic production function. The empirical findings show that in the first half of the period most of the textile groups displayed high levels of efficiency, which can be attributed to a situation dominated by complacency and status preservation. In the second half, perhaps as a consequence of the forthcoming liberalization of the sector (on January 1, 2005), there was an increase in inefficiency. This was considered to be a result of the reaction to the new competitive scenario on the part of the enterprises, which is the force for change and the power that drives the sector.

(ProQuest: ... denotes formulae omitted.)

Introduction

Toward the end of 1995 the decision was made to abolish the quota system on the importation of textile products and as on January 1, 2005 the so-called Multi Fiber Arrangement (MFA)1, which protected the textile sector in industrialized countries from Asian competitors2, ceased to be applicable.

The growing and increasingly aggressive competition that the European textile industry has had to face from countries such as China, India, Pakistan or Vietnam, which is essentially based on low costs, has led it to a state of profound crisis. Some recent figures offer a perfect portrayal of the effects of this situation of competitive disadvantage experienced by the textile industry in general. According to the European Apparel and Textile Organization (Euratex ), every day 1,000 jobs are lost and 50 firms close down in the European Union (EU) and forecasts estimate that a million jobs will vanish by the end of 2006 as a result of the avalanche of textile products coming from China. In the year 2004 alone, 165,000 jobs were lost and 11,500 firms disappeared from the European textile sector (Euratex, 2005).

In Spain, Europe's third largest manufacturer of textile products after Italy and Germany, with an output worth over euro22,500 mn and more than 200,000 employees, in most of the firms the crisis began in the year 2004, when orders started to decline as a result of distributors' taking advantage of the quota liberalization process. Throughout 2004, 800 firms and 35,000 jobs disappeared. By the end of 2005, almost 10% of the 7,000 textile firms had closed down and another 19,000 jobs had been lost.

In highly competitive environments, like the one that characterizes the textile industry, the evaluation of efficiency has recently become an important issue in the business world. The level of productive efficiency in firms has a direct effect on their level of competitiveness (Taymaz and Saatci, 1997; and Roca and Sala, 2005). It is crucial to be able to analyze the competitive positioning of firms and it also plays an essential role in their strategies (Duch, 2006). The efficient use of productive resources is a strategy that allows firms to improve their costeffectiveness (Sellers et al., 2002). Hence, we cannot completely separate efficiency from the actions that can be taken in order to be competitive. On the contrary, its presence facilitates competitiveness and, as a result, the presence of competitors induces firms to seek efficiency (Porter, 1990).

Thus, it seems rather imperative to conduct a study to reinvestigate the Technical Efficiency (TE) of the Spanish textile industry. More specifically, our aim is to analyze the evolution of the TE of the textile sector over the period 1995-2005 and to determine how the industry has reacted to the new competitive scenario brought about by the low-cost manufacturers. The literature investigating efficiency in the textile industry has been dominated by two methodologies: the nonparametric Data Envelopment Analysis (Chandra et al., 1998; Lundvall, 1999; Zhang et al., 2000; Zheng et al., 2000; Bhandari and Ray, 2006; and Coll and Blasco, 2007) and the parametric Stochastic Frontier Analysis (SFA) (Pitt and Lee, 1981; Jaforullah, 1999; Ramcharran, 2001; Ayed-Mouelhi and Goaïed, 2003; Samad and Patwary, 2003; Kim, 2003; Parmar and Kumar, 2003; Mokhtarul, 2004 and 2007; Bhandari and Maiti, 2007; Kouliavtsev et al. …

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