While innovation can be a troubling concept in economics, its importance can not be overlooked. The ninth Sustainable Development Goal is to improve innovation and infrastructure of the economy. Our study documents firm level innovation in the textile sector of Punjab, Pakistan. In doing so, it aims to gauge how close Pakistan is to realizing the ninth Sustainable Development Goal.
As Pakistan’s largest and most important export earner, the significance of the textile industry can not be understated. By studying private textile firms in Punjab we were able to explore this sector through the lens of innovation at the firm level with the hopes of generating insights that can be translated into action – at the firm level as well as in aid of macroeconomic policy.
A unique data set of 180 observations was created and assembled by conducting detailed interviews with firm owners and managers, which were based on a structured survey.
Essentially, the survey aimed at documenting current barriers, R&D and innovation practices from the start of fiscal year 2014-15 to the end of fiscal year 2016-17, alongside documenting managerial practices and environmental cost of production.
The firms were divided across the three rungs of the value chain and by firm sizes within these firm types. The firm size is classified in terms of the persons/labor employed such that:
- A medium sized firm employs between 20 & 99 persons
- A large sized firm: employs 100 or more persons
- When undeclared, the firm did not respond to the number of employees’ question
Table 1: Author’s own calculation
The sample was split across the five major hubs of textile firms in Punjab:
Table 2: Author’s own calculation
“Product Innovation is defined as the introduction of a good or service that is new to the market or is a significantly improved version of a current product.”
Of the 180 firms studied, 39% reported to have conducted product innovation.
Our study found that, on average, product innovation is responsible for more than a third of sales.
Why do firms conduct product innovation?
84% of firms reported extending the range of goods and services being offered and opening new markets as the primary reason for innovating.
In a way, this testifies to firms’ rationality and nullifies the neo-classical notion of a firm engaged in the production of a homogenous product – firms place importance on the notion of growth and are cognizant that consumer preferences evolve.
Firms’ decisions are demand driven rather than cost minimization.
How do firms develop product innovation?
The more collaborative a sector is – intra and inter – the more innovative it is likely to be. While it is true that incremental innovations lead to radical innovation they are not the only way forward and the deeper the connection between industry and academia, the better are the chances of radical product innovation being developed.
Our study found that when it comes to production innovation, collaboration with academic and research institutes is nonexistent and, coupled with extremely high levels of in-house research efforts, the needle on innovation does not move.
This shows that the key stakeholders – firms, academia and government – are operating in silos. In particular, it seems that the relationship between firms and the government is parasitic and marred by suspicion while one reason for the high level of in-house development is that firms have enough skilled labor on their payroll.
Features of Product Innovation
Our study found that an equal amount of resources is directed to originating and adapting. This testifies to the incremental nature of innovation in the product sphere. Our study also highlights the weakness of linkages in the product sphere and makes a case for more and meaningful collaborations between the key stakeholders.
“Process Innovation is defined as the implementation of a new or significantly improved production process, distribution method, or supporting activity.”
Of the 180 observations, 51% of the firms reported to have conducted process innovation.
Why do firms conduct process innovation?
Our study found that in Pakistan’s textile sector, not only do more firms report conducting process innovation than product innovation, but the reasons for introducing process innovation are also more pronounced.
The most prominent of these reasons is to improve the speed of production, which is in line with the fact that the highest proportion of firms conduct process innovation in the subcategory method of production.
Features of Process Innovation
Our study found that the most significant feature of, or motivation for, process innovation is the automation of manual processes and the use of more efficient technology.
How do firms develop process innovation?
Our data shows a more collaborative stance taken by firms when it comes to process innovation, as compared to product innovation. This can be traced to a lesser prevalence of in-house development of innovation and relatively stronger ties with other firms and organizations such that a substantial and majority of firms engage with each other constructively to exchange information.
However, we found that professional organizations and associations like All Pakistan Textile Mills Association (APTMA) and local chambers of commerce, play a limited role in firms’ efforts to innovate which is rather alarming and needs be addressed in order to improve and increase process innovation.
Research & Development
The existence of an R&D department does not imply or guarantee higher levels of innovation, but it is a good starting point. We do not postulate a linear and clean relationship between innovation and research; in fact, our data shows that a firm is not necessarily an innovator just by having an R&D department.
While the low R&D budgets may seem to justify this, we suspect that cost is a feeble barrier to entry and the quality of research along with reported high levels of adaption may serve as better explanations for the low level of R&D departments in this sector.
Our study also deconstructed this relationship by profiling firms with R&D departments and exploring the interaction between R&D, Innovation and Exports.
Table 5: Profiling firms with R&D Departments (Author’s own calculation)
Figure 10: Interaction between R&D, Innovation and Exports
Age & Size
What types of firms are innovative?
Age & Innovation:
We divided firms in three classes of ages and found a substantial reduction in the number of innovating firms as the age increases and that the highest absolute number of innovators exist in the class of 21-40 years.
Size & Innovation:
Our study found a higher absolute number of innovators in large firms than in medium sized firms. It is important to note, however, that a higher number of firms are process rather than product innovators which is indicative of the fact that the nature of innovation in the textile sector is incremental.
From a policy perspective, it appears that large sized firms between the ages of twenty-one and forty could be the vehicle of change to make Pakistani textile firms more innovative.
Our study also chalks out the investment climate within this sector by exploring the various obstacles the firms face, as well as their severity.
Our findings suggest that firms that are innovators and have formal R&D departments as part of their organizational structure are less likely to face obstacles in obtaining external finance, which gives way to better chances of growth.
Competition (National Market)
41% of our respondents identified the national market as the main market where they sold their goods and all of them faced competition. Our study found that not only is the Pakistani textile sector competitive, it also has a high prevalence of informal firms and operates at full capacity.
Competition (International Market)
49% of our respondents identified the international market as their main market and all of them faced competition.
72% of these firms faced competition from informal firms and while we do not know whether competition was faced in the secondary market or in the international market, the latter would imply that informal and unregistered firms in Pakistan are plugged into the international market.
At a time when Pakistan’s water scarcity is well established, our instrument is one of the first that asked firms about their precise water usage and discharge. We found that innovating firms use and discharge less water than non-innovating firms and, therefore, can be key allies in mainstreaming responsible water use and conservation.
Obstacles to Export
The most severe obstacle to export is price competitiveness as Pakistani exports face stiff competition from far Asian substitutes. To counter this, there needs to be radical innovation in this sector; firms needs to be more entrepreneurial and need to climb up the value chain of textile, where price is a smaller concern. In addition, any government effort will not be enough to bring a sustained improvement unless it is matched with sustained efforts to innovate.
Pakistan was granted the Generated System of Preferences Plus (GSP+) by the EU in 2014 which resulted in a manifold increase in textile exports originating from Pakistan and finding their way to Europe. However, the growth of Pakistani exports to the EU have stagnated. In addition, the cost of production in Pakistan continues to rise and there is a swing in preferences for textile products that are ethically sourced and responsibly produced. So, Pakistani exports have a market driven policy direction.
As for China, it is advisable that Pakistan revisit the terms afforded to textile exports originating from Pakistan since some of the major exports do not get any concession at all-for similar products, ASEAN countries get duty free access while Pakistan does not.
Dynamism is important and while a firm that is an exporter is not automatically better than one that is a non-exporter, for the purposes of this study, we assume that exporting firms are more dynamic than their non-exporting counterparts.
Our study explored the reasons why firms choose not to export and also disaggregated these reasons according to the value chain of the Pakistani textile sector. To the best of our knowledge, this is the first time such high resolution data has been collected and analyzed to study firm dynamism in Pakistan.
Our study also explored the obstacles faced by textile firms in current operations. It is important to note that close to 30% of the firms identified access to production technology as a very severe obstacle while the availability of skilled labor was not identified as an insurmountable obstacle.
The most pressing obstacles were currency exchange rate and price increases of key inputs like fuel and electricity.
Financing acquisition of fixed assets
Our study found firms to operate in line with the post-Keynesian theory of firm by protecting themselves from unnecessary exposure and resorting to the use of retained earnings and other internal funds to finance purchase of fixed assets than getting financing from banks.
Author: Dr. Izza Aftab