The Effect of the Globalization of Production on the Textile Industry
Andrea Deal

Table of Contents

Introduction 2

The Globalization of Production 4

The Impact of the Globalization of Production

on the Textile Industry 8

Case Study: Indonesia 12

Conclusion 19

Bibliography 21


The years following World War II saw a growth of modern technology, which has changed production industries entirely. Increases in wage differences across the globe, while costs of transportation and communication drop, has driven labor intensive production out of the developed countries, and into developing countries. In most cases, manufacturing in developing countries is of relatively simple, labor-intensive products, while the developed countries specialize in producing high-tech, capital-intensive products. Globalization of production has changed the way that trade is conducted across the globe.

The textile industry is one in which the globalization of production is easily apparent. Production of high-end materials and high-tech machinery is carried out in the developed countries of North America, Western Europe, and Japan. Due to a large workforce, low wages, and low technology, textile and apparel production has arisen in developing countries, particularly in Asia. In most cases, the textile industry has become a mainstay in the economy.

The textile industry is an important source of employment and revenue in Indonesia. The textile and garment industries together are the second largest export earner after gas and oil. They are also the most labor intensive of Indonesia’s manufactured exports, making them a very important source of employment (Hill, 1992). Wages are very low compared to other countries, but that allows Indonesia to be internationally competitive. Indonesian textiles hold cultural and religious importance as well. Textiles are widely considered to have magical and protective powers. Sacred festivals marking rites of passage such as birth, coming of age, marriage and death, all involve the preparation, presentation, and display of a specific sacred cloth. Traditionally, textiles are also a sign of wealth and status. Batik and ikat are two of the more famous traditional Indonesian textiles (Hitchcock, 1991). Large scale industrialization and mechanization of the textile industry has changed the face of textiles in Indonesia. Traditional hand weaving has been outmoded, and some traditional textiles have ceased to be made. Smaller businesses are not able to compete with the large corporations, and skilled craftspeople have been lost to factories.

Recognizing the globalization of production in textiles is important for several reasons. Emphasis in developing countries is now placed on the low or no-skilled labor intensive production of textiles and apparel as opposed to the skilled craft, practiced for centuries on every part of the globe. As textile technology becomes more capital-intensive, it will become less labor-intensive. Eventually, people will be replaced by automation, and thousands of people will be out of work and without skills. In the case of Indonesia, some traditional textiles are no longer produced, and some can only be seen in museums. This is a great loss to the Indonesian culture that places such a high value on textiles, and to the international textile design community as a whole.

The Globalization of Production

Globalization can be defined as a "process in which the production and financial structures of countries are becoming interlinked by an increasing number of cross-border transactions to create an international division of labor in which national wealth comes, increasingly, to depend on the economic agents in other countries" (Firth, 2000). Characteristics of globalization are rapid growth in trade, increases in flow of capital across the globe, trade in new kinds of services, a communications revolution, and the growing influence of global market forces. The world economy has become increasingly integrated in the years following World War II, "transforming the way the world works, thinks, and consumes" (Globalization, 1998).

Widespread globalization of production is a reaction of the industrially developed countries facing competition from low-cost imports. Producers move uncompetitive production processes to less developed countries where production costs are lower. The success of this strategy is dependant on relative costs of labor, transportation, communications, and the comparative cost of automation- the principal alternative to labor-intensive production (Grunwald, 1985). Overall, it has been a successful way for firms in developed countries to remain competitive, and has led to the increased prosperity of underdeveloped or developing countries.

The period following World War II marked the beginning of the globalization of production. Worldwide competition in manufactured goods increased as production in Western Europe and Japan recovered and they became industrial powers equal to that of the United States. The United States was the first to be affected by the growing competition because wages were so much higher than in other countries. U.S. firms reacted by moving labor-intensive stages of production to other countries where wages were lower. Western Europe and Japan were the next to face the problem of uncompetitive, high production costs. The advanced countries of Europe responded by importing low-cost labor, and Japan increased automation. Asia and Latin America became the principal locations for U.S. production abroad, and electrical machinery was the main product (Grunwald, 1985).

Developing countries have been the primary participants in the assembly of foreign goods because of the huge difference in wages between them and the developed countries. It is a lot cheaper to perform assembly in developing countries where wages are low and there is an abundance of untrained labor. The more highly skilled operations are performed in the developed countries which have an abundance of skilled labor and technologic and scientific resources (Barnet and Cavanagh, 1994). This international division of labor divides manufacturing industries into two categories. The traditional industries use stable, widely available technology to make relatively simple products. The high-tech industries, on the other hand, use rapidly developing technology to make a continuous stream of quickly obsolete new products. Traditional industries are the leading exports in developing countries because of the low development costs of establishing production and the large supply of low-wage labor. High-tech industries are more suited to the industrially developed countries because of the need for specialized resources in research and development, and the complex production processes (Fingleton, 1999).

Another response to a highly competitive global market was to place restrictions on trade. This has also worked to further the globalization of production in different ways. When a developed country, such as the United States, is threatened with cheaper imports invading the domestic markets, it will respond by restricting the import of certain goods, or placing a quota on the amount of a particular product that a single country can import. Other developed countries attempt to work around quotas by opening production plants in nearby developing countries, and then exporting the product directly from there. Also, by placing quotas on goods, no one country can dominate the market, allowing several smaller countries a chance to gain access (Dickerson, 1995). More recently, however, trade restrictions have been lifted, stimulating an increase in the volume of imports and exports. The volume of world merchandise trade in 1997 was about 16 times what is was in 1950 (Globalization, 1998).

The decision for a company to produce and market globally is based on several factors. Transportation costs, the ability to separate labor-intensive operations from other steps in production, and the capital intensity of assembly operations, are all important considerations. The apparel and electronics industries are ideal for assembly abroad because of the high value-to-weight ratio, easy separation of production processes, a relatively small input of capital, and large demands for unskilled labor (Grunwald, 1985). Thanks to globalization, though, international commerce has become an option for more industries. The general worldwide decline of trade barriers, the opening of countries that were previously not a part of the world economy, such as China and Mexico, and most importantly, the rapidly falling price of getting goods to markets, have allowed more products to be produced and marketed globally (Globalization, 1998).

There is some amount of controversy surrounding the globalization of production. How much employment is actually generated, what the quality of the employment is, what kinds of technologies are transferred, the actual economic contribution to the developing country, and whether the economic stability of the country is jeopardized by dependence on an export market, are all under debate. Some developing countries see themselves as victims of globalization, because it is "proceeding largely for the benefit of the dynamic and powerful countries" (Globalization, 1998). In the United States, there has been concern over any loss of jobs to the developing countries and a possible loss of competitiveness if a technology leak occurred. Proponents, however, claim that both developed and developing countries benefit from this arrangement. Underdeveloped countries gain a much needed source of employment for the large, unskilled workforce that would have no better means of employment, managerial expertise, and technology. Wage rates in the developing countries also raise slightly, because the demand for labor increases. The U.S. industries may see some decline in jobs, but assembly abroad usually brings an overall increase in domestically produced components, and makes them more competitive (Grunwald, 1985).

The fact is, developing countries have chosen industrialization and production for foreign firms as a means of development and economic advancement, and have sought out foreign direct investment from multi-national corporations (Globalization, 1998). It is likely that developing countries will continue to assemble and produce goods for foreign companies and markets, despite the consequences. The industries that rely on the globalization production, such as electronics, apparel, and automobiles, rely on the globalization of production as a necessary part of their economic survival. Automation is not a viable alternative for electronics and apparel, because it requires large investments in rapidly changing technologies and styles. Finally, the globalization of production has lowered the cost of the product to the consumer and increased profits for large companies.

The Impact of Globalization of Production on the Textile Industry

The textile industry is one of the most important industries for developing countries. After food processing, textile production is one of the largest manufacturing activities in the early stages of industrialization. Textiles are a significant source of employment, supply a basic domestic commodity, and offer a spearhead for exports for developing countries. The prominence and importance of the industry is based on several factors. Textiles make up a large portion of non-food budgets in low income countries which allows the development of a large domestic market; it consists of standard, low-skilled production technology that is labor intensive; and the knowledge of technology and products is quickly and easily carried across borders (Hill, 1992).

Japanese textile firms started the first major wave of globalizing production by shifting manufacturing to less-developed countries in the 1960s. After using the textile industry to rebuild the economy following WWII, Japan became a leading contender in the global textile market. The United States, worried about Japanese imports invading U.S. markets, imposed restrictions on Japanese textiles. To get around this, Japanese producers established a network of manufacturers throughout East and Southeast Asia that could ship to the United States, avoiding "Japanese" restrictions. Japan was also a success story that newly developing countries wanted to emulate, and so were eager to enter into production with them. The rapid rebuilding and economic evolution due to the textile industry prompted newly developing countries to choose textile production as a route to economic advancement (Dickerson, 1995).

The globalization of production has occurred in recent years as almost all countries began producing textiles for the world market. The most underdeveloped countries are the newest entrants into the industry, participating in the simplest forms of production. This may be the production of natural fibers such as cotton or wool, or simple apparel assembly. These aspects of production are easily carried out by underdeveloped or newly developing countries because they are labor-intensive, and do not require large amounts of capital or technology. In the case of assembly operations such as apparel, production is often performed for multi-national firms headquartered in more advanced countries. As countries develop, they are usually able to move forward to somewhat more advanced levels of textile and apparel production. Yarn, fabric, and other intermediate parts that were previously supplied by a more developed country begin to be produced domestically, making the country’s industry more self-sufficient. Production then becomes more technically advanced, and the industry is able to compete in a wider range of textile and apparel production. Depending on level of development, production facilities are owned by either local or foreign firms. South Korea and Taiwan are countries where domestic companies own the technologically advanced fiber production plants. Once a developing country has reaped the benefits of textile and apparel production, it may be able to focus more on Dickerson, 1995

industries commanding higher wages and higher profits, such as electronics or computers. As the textile industry contributes less to the national economy, less emphasis is placed on textile and apparel production, and production shifts to another low-wage, developing country (Dickerson,1995). Examples of this are Singapore, Taiwan, and South Korea, three of the so-called "Asian Tigers," which have achieved economic success due to the textile industry, but have moved on, at least somewhat, to more profitable industries such as electronics. Textile and apparel production has recently moved from these countries to the less developed countries of Vietnam, the Philippines, and Indonesia (Barnet and Cavanagh, 1994).

Another reason for the globalization of production is competition. As the number of textile producing nations grew, competition became more and more intense. By the late 1980s, production of most textiles in the industrially developed countries, such as the United States, Western Europe, and Japan, became too expensive to compete with imports due to rising wages and production costs. For this reason, a large portion of fiber, yarn, cloth, and garment production was relocated to less-developed countries with lower wages to save on labor costs. Contracting out to countries with cheaper labor costs became a popular practice as transportation and communication costs declined throughout the 1980s and 1990s. This practice is responsible for expanding or establishing production in many underdeveloped countries that may not have been able to produce textiles for the world market otherwise.

Textile industries do not usually move out of a region altogether, though. Technologically advanced countries in North America, Western Europe, and Japan still have active textile industries, but do not produce the same things as they once did. Since labor-intensive production is carried out in less-developed countries, more automated capital and technology-intensive production is carried out in the more developed countries. In the case of the United States, components, such as yarn, are imported, and high-end cloth is produced, usually for the domestic market, or for other developed countries with spending ability. A quick look at any garment tag will confirm the fact that most apparel in the United States is made in developing countries. This is because it is more likely to require large amounts of labor than capital. Upholstery and home furnishings fabrics, however, are more often produced in the United States, due to their more technology and capital-intensive nature. Highly technical industrial fabrics are also produced in North America, Western Europe, and Japan (Dickerson, 1995).

The globalization of production in the textile industry does allow more countries to produce textiles, but also reduces the ability of small businesses to survive in an increasingly global market. Large corporations have a huge advantage in production capacity, allowing them to produce the same product for less money. "Companies which do not operate and manufacture most efficiently will soon be taken over by those who do" (Globalization, 1998). As the number of large, foreign corporations with a large supply of capital increases, it is often easier to earn a livelihood working in the factory than continuing a small business. Also, small business often do not have the capital to purchase machinery, leaving them stuck with slower, more expensive methods of production (Hill, 1992).

The textile industry plays a significant role in the early stages of development for most countries, often initially the only means of economic advancement. For this reason, the state of the textile industry often indicates the overall economic and other development in the country. Success in the textile industry usually leads to more advanced industries, promoting nationwide growth. The globalization of production has been a boost for the textile industries of developing countries, there by advancing economic and technological development as a whole.

The Textile Industry in Indonesia

The textile industries of many developing countries are perhaps the most affected by the globalization of production, and Indonesia is a good example of this phenomenon. Indonesia is unique compared to other developing countries, in that it has a number of natural resources, most profitable of which is an abundance of natural liquefied gas. The textile and apparel industry is economically important as a major source of employment, and is especially important as an effort to diversify the economy away from its heavy reliance on oil and gas products (Hill, 1992). The country is currently recovering from the economic crisis of 1997, a currency crisis, and unstable political conditions. The textile and apparel industry remained strong and managed to compete effectively on exports throughout the crisis, and was the first industry to recover during the country’s economic rehabilitation. The other industries most likely involved in the globalization of production, electronics and automobiles, were the next predicted to recover from the crisis (Challenge of Overcoming Political Instability, 2000).

Indonesia falls in the middle of the globalization process. The country has not become an industrial superpower, like some other countries in Southeast Asia, but has progressed beyond the point of manufacturing relatively simple products for foreign firms, and other industries in the country are also thriving. Indonesia is an attractive producer of textiles and apparel because of the large, low-skilled labor supply, wages far lower than those in developed countries, and an abundant supply of energy resources. In the industrial infancy of the country, the Suharto government, which came into power in the 1960s, promoted both foreign and domestic investment in textiles and garments in an attempt to foster domestic growth and build export potential. The plan worked. The textile industry expanded extremely rapidly due to strong demand growth, large consumer backlog, and high import protection. As Indonesia became more industrially advanced in the 1970s, heavy processing and engineering industries achieved greater importance and vigorous promotion. Since the late 1980s, domestic investment in the industry has exceeded foreign investment, most years even double (Hill, 1992). More of the industry is devoted to the domestic market, as 50% of textile products were consumed domestically by 1998 (Lohia, "Country Perspective," 1998). This shows that the overall economy of the country has improved, and the textile industry of Indonesia is becoming self sufficient.

The textile industry in Indonesia, as in most developing countries, is comprised of three distinct sectors: spinning and synthetic fiber production, weaving and fabric production, and garment production. Factory weaving emerged in the 1920s with the introduction of the upright hand loom, with power looms following shortly there after. By the late 1970s, hand looms were simply unable to compete with power looms because of the enormous productivity gap. Also, the wages of hand loom weavers in the 1970s were only a fifth of that of power loom operators (Hill, 1992). Weaving and fabric production has the highest output of the three sectors of the industry, with a capacity of almost 2 million tons (Lohia, "Country Perspective," 1998). Woven fabric exports brought in US$1.5 billion in 1999, and other fabrics such as knits and carpets brought in roughly US$77 million (Textile Trade, 2000). Weaving and fabric production firms are owned by a combination of government-run mills and foreign firms.

The spinning, fiber, and garment sectors are relatively new to the industry, appearing in the 1960s. Polyester fiber production emerged on a significant scale in the 1980s and has grown to dominate the man-made fiber sector, growing 3.7 times in the last seven years (Lohia, "Country Perspective," 1998). Exports of manufactured fibers totaled almost US$72 million in 1999, and exports of spun and filament yarn were over US$1 billion (Textile Trade, 2000). Due to the capital and technology-intensive nature of fiber production, and the need to import foreign technology, spinning firms have a high amount of foreign ownership. Larger spinning mills (those employing 200 or more) are especially prone to foreign ownership, partly to outweigh the costs incorporated with "being foreign." Employment in fibers and spinning is the highest of the three, but the garment sector is the most labor-intensive. Garment production did not really emerge as a factory activity until the 1970s. The garment industry is owned almost entirely by domestic firms who are export oriented. Garment export comprised 35% of total exports of the entire industry (Lohia, "Country Perspectives," 1998) and garment exports made over US$3 billion in 1999 (Textile Trade, 2000). Many garment firms are small, which employ 5-20 employees, or medium sized, which employ 200-1000 (Hill, 1992).

Increasingly, textile firms are becoming more vertically integrated. Large firms are now including fiber production, spinning, weaving, finishing, and dyeing under one corporation. Vertical integration saves costs by speeding up and combining various production processes. An example of a vertically integrated, foreign owned company is P.T. Mermaid Textile Industry Indonesia (Mertex). Mertex started operations in 1974, producing lightweight woven fabrics primarily for the domestic market. Today, Mertex is an integrated spun textile manufacturer covering spinning, weaving/knitting, and dyeing and finishing. It’s sister firm, P.T. Mermaid Garment Industry, produces knitwear apparel on the same site, using Mertex’s knitted fabrics. Both companies are owned by Shikibo Ltd., in Japan. Every month 20 tons of knitted fabric and 40,000-50,000 yards of woven fabric are sent to the apparel factories within the group, namely, P.T. Mermaid Garment Industry. Total, Mertex produces 80 tons of knitted fabric a month, and 2 million yards of woven fabric. The primary market of their fabric and apparel is Japan, but Mertex also plans to aim exports at customers in the United States and Europe (Mertex, 1997-98 and 2000-2001).

A consequence of large firms that dominate the textile industry is that individuals and small firms are unable to compete. Garment production and some traditional textiles are the only places where small businesses are still seen. Large factories present the greatest challenge to the indigenous handloom industries of Indonesia, because "a factory can produce in a day what a skilled worker may take many months to achieve" (Hitchcock, 1991). Small Indonesian textile factories generally operate on low overheads and narrow profit margins, and offer "tedious and poorly paid" work for unskilled employees. These factories also "offer limited job security, and workers are laid off during lulls in the economic cycle" (Hitchcock, 1991). The only reason small factories survive at all is because of their ability to easily adapt to changes in market conditions, and to supply fabric to businessmen, local administrators, and tourists.


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