PERCEPTIONS OF INTERNATIONAL TRADE BARRIERS: EMPIRICALSTUDY OF SMALL APPAREL FIRMS

ABSTRACT: Perceptions of international trade barriersare important in the decision of firms to export. This study makes an empiricalanalysis of the perceptions with respect a particular sector. Two industrialhubs (locations) were chosen. The perceptions of the firms were very differentin the two locations (in the same geographical region of the country). In oneof these, lack of knowledge (in particular, lack of staff for export planning)was found to be the most important barrier as perceived by the firms, whilecompetition was found as the most important barrier in the other. We also foundfurther clusters within each of the two industrial ‘clusters’. It is not justthe firms which can be associated with some stages of internationalization butthe clusters can also be in different evolutionary stages ofinternationalization, in view of the differences. Policy makers may note theseand focus their export promotion and information dissemination plans based oncluster membership so as to improve perceptions.

Keywords:International marketing, trade, barrier, perception, apparel

1. INTRODUCTION

Internationalisations of firms through exporting andproblems faced by firms to export (in particular, to start exporting) have beenstudied by several authors (Leonidou, Katsikeas, et al. 2007). However, thebusiness context has been evolving significantly in the face of an informationexplosion on internet (increased knowledge) and spate of regional tradingagreements. The motivation of this paper was to test empirically as to whether theproblems identified by previous authors were still perceived by the firms oftoday in the context of small apparel exporting firms from India

[if !supportLists]1.1  [endif]Context of textile and clothing exports from India

Exports have been increasingly become very importantfor the Indian economy. Not only is it fulfilling domestic demand but alsobuilding foreign exchange reserves to cushion for shocks and bad days. Table Aprovides the role of trade in the economy along with the build-up of theforeign exchange reserves.

The textile and clothing sector comprise about 11% ofthe exports. Clearly the sector is very important. The item-wise breakup of theTextile and Clothing exports is given in Table B.

Most countries consider exports as a top priority inorder to drive growth. In particular, the story of fast-growing Asian Tigers islargely export-driven.

The basic trade strategies for development are (a)Import Substitution and (b) Trade Promotion (Todaro and Smith 2009). In theformer, countries (particularly the Least Developed Countries) in the firststage, substitute domestic production of imported simple consumer goods. In thesecond stage, they substitute the wider range of more sophisticatedmanufactured items behind the protection of high tariffs and quotas on imports.In the strategy of trade promotion there is no trade protectionism but focus onincentivised production and large-scale exports. The advocates of ImportSubstitution cite balanced growth and learning by doing principles. Theadvocates of Export Promotion cite large markets, distorting effects ofprotection and successes of East Asian export-oriented countries as examples.

1.2 Export promotion in India

India followed the strategy of Import Substitutioninitially. This led to a strong public sector. The National Textile Mills is anexample in the Textile and Clothing sector. Domestic industry was protectedthrough tariffs (import duties) in several product lines.

India initiated major policy reforms in the early1990s. This has been consistent, by and large. India‟s simple average tariffrate came down significantly from 128 percent in 1991 to about 34 percent in2000. The trade weighted tariffs declined from 87 percent in 1997, havingreached about 355 percent (Rajan and Sen 2002).

The last WTO Review (2011) summarizes the measure ofIndian tariffs as follows: “India's tariff is announced in the annual Budgetbut individual tariff rates may be changed during the year. In addition to thestandard tariff rate, importers are required to pay an additional duty("countervailing duty") and a special additional duty instead oflocal taxes. To determine the "effective" applied tariff rate (i.e.basic duties and other customs duty) on a particular product, separate customsand excise tax schedules must be consulted, which adds to the complexity of thetariff. India's tariff comprises mainly ad valorem rates (some 94% of tarifflines), levied on the c.i.f. value of imports; and some alternate or specificduties (6.1% of all tariff lines). During the period under review, the averagetariff rate declined: the simple average applied MFN tariff was 12% in 2010/11,down from 15.1% in 2006/07. This is reflected in a decrease in bothagricultural and industrial average tariffs due to India's shift towards lowertariffs.” (WTO 2011)

In the Foreign Trade Policy (FTP) of 2004-09, theobjectives were (a) to double India's share of global merchandise trade withinfive years, and (b) to use trade expansion as a policy to promote economicgrowth and employment generation. The objective in the 2009-14 FTP was toreverse the declining trend of exports in the context of the global crisis.Presently, India's short term objective is to achieve annual export growth of15%; the long term objective is to achieve export growth of 25% per annum anddouble India's share in global trade by 2020. The policies are a mix of taxincentives, export promotion, credit facilitation schemes, support to"neutralize" the cost of imported inputs used in exports, improvementin infrastructure, and promotion of market and product diversification.

The export promotion policies in India operate in thefollowing framework (Foreign Trade Policy 2009-14 Chapters):-

1. Special Focus Initiatives (Chapter 1B)

2. Promotional Measures (Chapter 3)

3. Duty Exemption / Remission Schemes (Chapter 4)

4. Export Promotion Capital Goods Scheme (Chapter 5)

5. Export Oriented Units (EOUs), Electronics HardwareTechnology Parks (EHTPs), Software Technology Parks (STPs) and Bio-TechnologyParks (BTPs) (Chapter 6)

6. Special Economic Zones (Chapter 7)

7. Free Trade & Warehousing Zones (Chapter 7A)

8. Deemed Exports (Chapter 8)

The most important measures are summarized below:-

1. Duty Drawback – A percentage of the value ofexports is directly credited to the bank account of the exporter immediatelyafter shipping, based on the shipping bill declaration. For cotton apparels itis about 7.9%.

2. Market Development Assistance – Subsidy from theGovernment is available for the participation in international fairs andexhibitions and other matters.

3. Market Access Initiative – Subsidy from theGovernment is available to export promotion councils and trade bodies fororganizing events for trade promotion, carrying out research studies,setting-up ware-houses abroad and other matters.

4. Import Certificate – Duty-free import of about 3%of the export value for certain goods used as inputs.

5. Interest subvention – About 2% reduction ininterest rate for trade credit from banks. 6. Technology Up-gradation FundScheme – Capital subsidy on up-gradation of plant and machinery.

7. Focus Product Scheme / Focus Market Scheme / MarketLinked Focus Product Scheme – About 2% incentive is paid based on realisationof exports for listed countries and products.

Despite the slew of export promotion measuresundertaken in India, the export turnover has been way behind that of China inthe textile and clothing sector. China exported 80165 Mn USD of knitted ReadyMade Garments (RMG) to the world in 2011 while for woven RMG the figure was63074 Mn USD, which is about ten times the scale of Indian RMG exports. Theperceptions of the entrepreneurs in India regarding the export barriers wouldbe a critical issue. The evaluation of the perceptions could be a measure ofthe effectiveness of the Indian export promotion policy.

2. LITERATURE REVIEW

Exporting is the common way to internationalise,particularly for small firms (Mittelstaedt, Harben and Ward 2003). Perceptionof export barriers has been found to be the fundamental reason for why firms failto initiate, maintain or expand export activity (Zou and Stand 1998).

2.1 Internationalisation and behavioural theory of firms

The internationalization process of the firm has beenstudied from two major perspectives – a resource-based perspective and abehavioural perspective. The resource-based perspective is exemplified inidentification of latent internationalization stages based on indicators of thefirms‟ engagement and strategies in foreign markets over time, and the analysisof the firm‟s movement over time (Kamakura, Ramon-Jeronimo and Vecion Gravel2012). In this dynamic model, four stages were proposed (Domestic, EarlyExporter, Advanced and Global), and studied over a time period of 15 years. Thebehaviour-based perspective of the internationalization process has roots inbehavioural theory of the firm (Aharoni 1966); (Cyert and March 1963). Studiesproposed steps based on degree of control and degree of involvement (Wortzeland Wortzel 1981); (S. T. Cavusgil 1982).

A seminal work from the behaviour-based perspective oninternationalization of firms is the Uppsala model (Johanson and Vahlne 1977)(Johanson and Wiedersheim-Paul 1975). The 1977 model proposed an evolutionaryprocess of internalization of the firm. Prior to this model, literature wouldsuggest that firms would choose the optimal mode for entering an internationalmarket through analysis of costs and risks associated with the market and oftheir own resources. The evolutionary process suggested in the 1977 Uppsalamodel based on Swedish companies was that firms would begin with „ad hocexporting‟, build „establishment chains‟ through agents and thereafter throughown sales organization and gradually enter other markets with more „psychicdistance‟ (environments). There are two change mechanisms in the model. First,firms change through learning from foreign markets. Second, they change throughtheir commitment decisions product of the size of the investment times itsdegree of inflexibility) in the foreign market. This leads to more learning andthe next level of commitment of resources and so on in a „virtuous circle‟. The1977 model was revisited by the authors in 2009 to reflect globalisation andthe networked firm (Johanson and Vahlne 2009). In this „business networkinternalisation process model‟, partners share knowledge through atrust-building process coupled with learning of sources and capabilities ofcounterparts