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Lack of Financing Limits Innovation in Textile Exports
Productivity growth is critical for long term economic growth. A critical component of productivity growth is innovation and lack of innovation is usually a major problem in developing countries. The Innovation and Technology Centre (ITC) of the Lahore School of Economics conducted a survey in 2018/2019 to observe the growing trends in innovation and technology upgradation in the textile sector of Lahore. The purpose of this survey was to observe the extent, quality and impact of innovation activities on the performance and profitability of the innovating firms. The survey also looked at the barriers faced by the innovating firms in this sector. The data was collected from 125 firms involved in manufacturing readymade garments and other textiles during the period September to December 2018. The firms were also characterized in terms of exporters and non-exporters in order to see the innovative behavior of each.
In the literature, innovation related behavior has been linked to exporting behavior. In the surveys, a large percentage of these firms were exporting a majority of their output (81%-100%) abroad. These firms mostly exported to Europe, Asia and Worldwide. The survey found that exporters tended to be more innovative than non-exporters.
Funding of innovation can be a major issue for firms. In our sample, when asked about the sources of funding for innovations, a large proportion of firms reported that those innovations were financed by their internal resources only (equity funds). Whereas, almost half of firms said that their innovations were financed by using their internal sources as well as taking loans from the banks, while a very small percentage of firms said that their innovations were financed using both internal resources and aid from the government. Looking at sources of funding for innovation across sectors, most of the garments manufacturing firms were self-financed whereas, almost half of the textile manufacturing firms financed their innovation activities with the assistance of financial institutions.
It is also important to understand the impact of firm level innovation. In our survey, it was found that a significant amount of innovation had been directed towards improving the quality of products and had also resulted in an increase in revenues. Looking sector-wise, innovation led to improved quality of products for both textiles and readymade garments sectors, as well as reducing cost of production for the readymade garments sector and increasing revenues for the textile sector.
When asked about the impact of various types of innovations on firm profits, a majority of firms reported that innovation in products resulted in higher profits while less than half of firms said that innovating in technology/equipment resulted in higher profits. Looking at the types of innovations increasing profits across sectors, the most important factor for garments manufacturing firms were product innovations, whereas, for the textile manufacturing firms, product and technology innovations contributed most to their firm's profits.
The incentives to innovate are particularly important for firms. In our survey, when asked about the most significant factor driving innovation in their industry, a majority of firms reported pressure to increase the quality was one of the most significant drivers of innovation followed by the desire for market leadership. Looking sector-wise, a large number of readymade garment sector and a large number of textile sector firms reported that increasing the quality of their products was the most significant driving factor for their specific industries. So, we can conclude that the main reason for innovation in our sample was to improve the quality of product.
One simple measure of innovation is the purchase of machinery. Looking at the purchases of machinery by firms, we find that a large number of firms reported that they purchased new machinery and/or software. Looking sector wise, a majority of firms in both the textile and readymade garments sectors said that they purchased new machinery, and the percentages were similar across sectors. The timing of innovation is also important: In the sample, more than half of the firms said that this innovation took place in the last 1-5 years. Also, the survey analyzed the future innovation plans of firms. A majority of innovating firms claimed that they were planning to introduce a new technology again in the next 12 months. Looking sector-wise, more than half of the textile firms said that they were planning to introduce a new technology in the next 12 months. On the other hand, most of readymade garment sector firms were not planning to innovate in the next 12 months.
When asked about the names of most recently acquired equipment, a majority of firms purchased stitching machines. When asked about how often the firms innovated in different types of innovation in the last 3 years, 83% of firms reported that they innovated in the areas of product, 77% innovated in marketing, 75% in process, 63% in technology and 33% in their business model. So, we can conclude that the main reason for innovation in our sample of firms is improving the quality of their product. When asked about how often the innovating firms innovated in the areas of product, process, technology, marketing and business model, a majority of firms innovated in the combination of 3 or 4 areas. The largest number of firms innovated in a combination of product, process and technology.
In developing countries, innovation can be adopted from other firms, from abroad or developed by firms on their own. In our sample, a significant number of firms reported that they adopted already established machinery/software. Most of the responding firms claimed to have purchased the technology/equipment from abroad. When were asked if they preferred making or buying new innovations, a majority of firms reported that preferred buying innovation. Whereas, the firms who preferred making new innovations were almost always large sized firms. Looking sector-wise, a majority of both readymade garment sector firms and textile sector firms preferred buying already established innovation.
Firms facing obstacles to technology adoption tend to be less innovative. In our sample, when asked about the barriers faced by firms while trying to perform technological innovations, the two greatest barriers faced by the firms were financing and lack of innovation opportunities. A large number of firms said that they did not have to retrain their employees in order to adopt the new technologies/software and a significant percentage of them claimed to have faced no resistance from their employees when trying to introduce innovation.
Overall, a majority of firms in our survey prefer buying innovations. A majority of responding firms reported that they purchased already established machinery/equipment from abroad in the last 1-5 years and most of these innovations were financed by using their internal resources. Also, a majority of innovating firms reported that they innovated in the areas of product and the main driving factor behind their innovation was to improve the quality of their product which eventually led to higher profits. The two greatest barriers faced while trying to perform innovation were financing and lack of innovation opportunities. It can be concluded that more incentives for innovations could be given by providing more sources of funding for the innovating firms in the form of aid from the government and with the assistance of financial institutions.
The research team included Dr. Azam Chaudhry, Dean & Professor, Faculty of Economics, Lahore School of Economics; Dr. Theresa Chaudhry, Professor of Economics; Saman Khan, Research Fellow and Talha Saqib, Research Associate.