Evolution of Clothing Industry in Central & Eastern Europe: From State-Socialist to Export, Exams of Business

Download Evolution of Clothing Industry in Central & Eastern Europe: From State-Socialist to Export and more Exams Business in PDF only on Docsity! Global value chains and business models in the central and eastern European clothing industry Adrian Smith and John Pickles 1. Introduction Recent years have been something of an ordeal for the central and eastern European clothing sector. Following two decades of steady and deepening integration into European production and contracting networks with their origins in European Union (EU) outward processing trade schemes (Pellegrin 2001; Begg et al. 2003), the sector has been struggling with three main challenges: the removal of quota-constrained trade,1 asso ciated competitive pressures from low-cost producers around the world (Smith et al. 2008; Pickles and Smith 2011), and the global economic crisis, which resulted in a significant reduction in demand in core European markets. This chapter examines the range of regional economic and employment adjustments that have taken place in the clothing industry in central and eastern Europe, focusing on the Slovak case as it has responded to these challenges. It situates this case study in the context of wider changes in the industry and its adoption of particular business models in central and eastern Europe. The chapter explores the ways in which regional concentrations of export-oriented clothing production sustained employ - ment in often peripheral regional economies when, particularly during the 1990s, de-industrialisation was occurring in other branches (Pickles 2002; Smith 2003). It examines how increasing competitive pressures started to unravel these regional production systems, leading to a much more differentiated landscape of firm-level strategies and uneven upgrading capacities among enterprises. Within the context of further economic crisis-induced restructuring over the past five years, the chapter highlights the ways in which proximity to key Western buyers, often through joint 319Foreign investment in eastern and southern Europe 1. The removal of quota-constrained trade at the end of 2004 was part of the phasing out of the Multi-Fibre Arrangement which had governed international trade in textiles and clothing for many decades. See Abernathy et al. (2006), Curran (2008a, 2008b), Gereffi and Frederick (2010) and Pickles (2006). ventures and foreign direct investment, has been one way in which production has been sustained in some peripheral regional economies. Reflecting on recent debates concerning industrial upgrading in the global value chain literature, the chapter makes two main conceptual contributions. First, it argues that too little consideration has been given to the wider political economy within which business strategies in global value chains are situated (see also Bair 2005; Selwyn 2012; Smith 2014). We seek to understand how the current global economic crisis is affecting the long-term sustainability of regionalised production systems and we highlight not only declining demand in core markets but the impacts that state policy frameworks for EU economic integration and the clothing industry’s ownership structures have had on the changing landscape of competitiveness. We highlight the role of foreign ownership in firms’ responses to these increasing competitive pressures; especially the roles that proximity to buyers, foreign investors and consequent connections to primary markets have in sustaining the production of particular products during times of liberalisation and crisis. Second, the chapter examines the role of labour in the tightening landscape of ‘relative competitiveness’ in global value chains. We argue that labour’s positional power2 within export-oriented value chains has led to some temporary and partial improvements for worker remunera - tion and working conditions. In particular, we show how the industry negotiated contract prices to reflect the higher wage claims of workers as local labour markets tightened. However, labour’s positional power also leaves it vulnerable to deepening competitive pressures as production costs have increased and trade liberalisation and the economic crisis since 2007 have exacerbated economic decline. Workers’ ability to leverage higher wages and associated payments heightened vulnerability to the loss of key orders from western European buyers. As they responded to local labour market conditions, export-dependent firms faced further competitive pressures as other costs – such as energy, short-term credit, and inputs – increased and employment growth in other industrial and service sectors further tightened local labour markets. A common, though not universal, outcome was firm bankruptcy and factory closure. Adrian Smith and John Pickles 320 Foreign investment in eastern and southern Europe 2. By labour’s ‘positional power’ we mean workers’ ability to leverage improvements in wage rates and/or working conditions in an effort to enhance their ‘conditions of social reproduction’. Recent work in the global value chain tradition has begun to argue that this constitutes a parallel process of ‘social upgrading’ running alongside ‘industrial upgrading’ (Barrientos et al. 2011). border value chains with important implications for the dissemination of the crisis (Smith and Swain 2010; Pavlínek 2012). Understanding the economic crisis therefore requires that analytical attention be paid to processes operating within global value chains beyond the increasingly dominant focus on industrial upgrading. Across the world, clothing industries have been experiencing the real material limits of market contraction in the context of crisis,3 and significant concerns are emerging over the sustainability of some production complexes (Forstater n.d.; Gereffi and Frederick 2010; Leucuta n.d.; Smith 2015). Our argument is that much – although certainly not all – global value chain research has neglected full consideration of the wider political economy within which value chains are embedded; notwith standing Smith et al.’s (2002), Bair’s (2005) and Selwyn’s (2012) critical evaluations, as well as work on global production networks (Henderson et al. 2002; Coe et al. 2004). This implies the need to consider a wider range of agents – other than firms and their managers – and a wider set of possible firm trajectories (other than upgrading) in the process of restructuring within global production (Smith 2015). This includes a consideration of workers in the establishment of competitive conditions within which firm- and regional- level trajectories play out (see Levy 2008; Selwyn 2012). In this chapter we explore the ways in which labour and labour costs in central and eastern Europe articulated with demand-side shocks associated with the crisis and inflationary pressures on the cost structure of the industry through integration in the euro zone. We consider the negative consequences of the 2008 economic crisis on consumer demand for clothing and how it became articulated with increasing production costs, including those associated with euro-zone accession. Those firms that were able to establish close relations with western European buyers through joint ventures with foreign investors were able to secure sufficiently long- term contracts, inter-firm know-how and access to investment to enable these firms to upgrade by implementing a fuller range of production activities beyond assembly production. As a consequence, they have been able to weather the crisis more effectively and even to implement technological and production upgrading programmes. However, this remains an uncertain strategy that has been possible only in a relatively small number of – nevertheless important – cases. Global value chains and business models in the central and eastern European clothing industry 323Foreign investment in eastern and southern Europe 3. Gereffi and Frederick (2010) estimate that US consumer spending in clothing fell by 3.6 per cent in 2008 and by 10 per cent in the first quarter of 2009. In the EU, household expenditure on clothing fell by 6 per cent between 2008 and 2009 (calculated from Eurostat data). In addition to a consideration of the political-economic dynamics in which global value chains are embedded, our theories also need to consider more fully the role of agents other than firm managers and buyers in value chain restructuring, particularly the role that labour plays in shifting landscapes of competitiveness and associated dynamics (Coe et al. 2008; Pickles and Smith 2011; Selwyn 2007, 2012). For example, as Bair (2005: 166) has argued, ‘firms that successfully participate in global value chains may not deliver benefits to workers in the form of higher wages, greater job security or improved working conditions’; which is most certainly the case at times of economic crisis. Smith et al. (2002: 47) go on to argue that labour must be analysed in global value chains as an active agent in the shaping of chain governance and competitiveness (see also Barrientos et al. 2011; Coe et al. 2008; Coe and Jordhus-Lier 2010; Cumbers et al. 2008). A key dimension of this more recent work has been to focus on the ‘social upgrading’ of the position of workers in global value chains in which improved working conditions (wages and formalisation of employment) and enhanced workers’ rights and entitlements (worker voice and freedom of association) are achieved (Barrientos et al. 2011; Posthuma and Nathan 2010). In this chapter we argue that some workers within export-oriented value chains in central and eastern Europe have been able to gain certain temporary, yet partial, victories, particularly in relation to wages. Firm managers have responded to tightening labour markets with wage increases and other enhanced employment benefits, but these have also created vulnerabili ties to the wider competitive pressures which the clothing industry has been experiencing, especially as it became affected by trade liberalisation and the falling demand due to the global economic crisis. Improved wages were not always achieved through the action of organised labour unions, which in the Slovak context are relatively weak or even non-existent in clothing firms that are not former state-owned enterprises. Rather, changes in wages and working conditions reflected capital’s reaction to tightening local labour markets and workers’ ability to demand wage increases. The close geographical proximity to its main markets that underpins the ability of the Slovak clothing industry to sustain itself has been severely tested as a result of the embeddedness of this system in wider political economic systems affecting corporate demand, on one hand, and labour’s uneven ability to secure gains, on the other. In the following section, we situate the Slovak clothing industry in the wider context of the industry in central and eastern Europe and its reconfiguration after the collapse of state socialism. We then examine the global and pan-regional competitive pressures experienced within the clothing industry and their impacts on the sector in Slovakia. Adrian Smith and John Pickles 324 Foreign investment in eastern and southern Europe 3. Business strategies in the central and eastern European clothing industry: from state-socialist full-package production to export processing Over the past twenty years, clothing producers in central and eastern Europe have been increasingly integrated into western export markets and European production networks. From the early to mid-1980s, producers in central and eastern Europe, particularly in Poland, Hungary, Bulgaria, and the former Czechoslovakia and Yugoslavia began producing under contract for manufacturing and retail companies in the EU (Fröbel et al. 1980; Lane and Probert 2009; Pickles and Smith 2011, 2016) and to a lesser extent in the United States. In the 1980s, state policy in western Europe – especially EU trade policies and customs agreements – played a vital role in encouraging European manufacturers and retail buyers to expand their production networks into central and eastern Europe (Pickles and Smith 2016).4 Full-bundle (later cut-and-make and cut- make-trim) production was encouraged under special preferential customs agreements known as outward processing trade (Pellegrin 2001; Begg et al. 2003).5 Full-bundle production refers to the system of export - ing from the buyer country all the components of a garment, including patterns, pre-cut fabric, yarn, thread, buttons and packaging, to be assembled in an central and eastern European country and then re- exported to the buyer country. The system was designed explicitly to protect western European fabric and yarn manufacturers, while giving them access to lower labour costs in assembly plants in central and eastern Europe. This process was driven directly by European Economic Community (EEC) and EU trade and customs policies through outward processing trade regulations, which created trade quotas allowing for production sharing arrangements to be established between EEC coun - tries and those in central and eastern Europe. Outward processing trade allowed the temporary export of fabrics and trim for outward processing in central and eastern European countries and the re-import of manu - factured clothing with duties being paid only on the value added; that is, the cost of labour for sewing (Pellegrin 2001; Pickles and Smith 2016). Global value chains and business models in the central and eastern European clothing industry 325Foreign investment in eastern and southern Europe 4. The 2001 ETUI volume CEE Countries in the EU Companies’ Strategies of Industrial Restructuring and Relocation (Gradev 2001) was particularly important in detailing the relationship between company strategies and the effects of relocation and contracting decisions on labour throughout ECE. 5. In Germany and the Netherlands, the more common term for full-bundle and outward processing trade is the Lohn system. It remains the primary mode of contracting for many exporting firms in central and eastern Europe. Adrian Smith and John Pickles 328 Foreign investment in eastern and southern Europe Figure 1 Clothing employment in central and eastern Europe, 1989–2010 Source: Based on International Labour Organization databases 0 50 10 0 15 0 20 0 25 0 30 0 35 0 40 0 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 Bulgaria Czechia Estonia Hungary Latvia Lithuania Macedonia Poland Romania Serbia and MontenegroSlovakia Slovenia Ukraine Em pl oy ee s (0 00 s) Figure 2 Clothing employment as a percentage of total manufacturing employment in central and eastern Europe, 1989–2010 Source: Based on International Labour Organization databases Bulgaria Czechia Estonia Hungary Latvia Lithuania Macedonia Poland Romania Russian Federation Serbia and Montenegro Slovakia Slovenia Ukraine 0 5 10 15 20 25 30 35 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 Cl ot hi ng e m pl oy m en t as % t ot al m an uf ac tu rin g em pl oy m en t The consequence was that for much of the mid-1990s clothing exports to core markets in the EU15 continued to grow, mostly via outward processing trade mechanisms. However, as trade became increasingly liberalised between the EU and the countries of central and eastern Europe (notably those themselves undergoing EU accession), outward processing trade regimes became less significant as manufacturers struggled to upgrade their functions and systems, and to capture higher profits from their contracts. Between 1995 and 2005 the phased removal of trade quotas resulted in increasing competition from producers in China and other lower cost locations which were able to undercut higher cost production on the margins of the EU (Curran 2008a, 2008b; OECD 2004; Pickles and Smith 2011; Staritz 2011). For example, Chinese and ‘Asian’ exports to EU markets increased rapidly (Figure 3). Exporters in Turkey, central and eastern Europe and North Africa continued to play an important role, but they also experienced a relative decline, with somewhat of a stabilisation of regional sourcing from the Euro-Mediterranean region in recent years. However, this macro-regional set of changes masks important national- level changes. For example, while Poland and Hungary saw an absolute Global value chains and business models in the central and eastern European clothing industry 329Foreign investment in eastern and southern Europe Figure 3 Share of EU15 clothing imports by macro-region, 1995–2012 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % China ‘Asia’ Turkey ECE Euro-Med 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 Notes: Asia: China, India, Bangladesh, Hong Kong, Indonesia, Vietnam, Sri Lanka, Pakistan, Thailand, Cambodia, Macau, South Korea, Lao, Taiwan, Malaysia. Central and eastern Europe: Romania, Bulgaria, Poland, Hungary, Czechia, Slovakia, FYR Macedonia, Baltic States, Ukraine, Slovenia, Belarus, Croatia, Bosnia & Herzegovina, Albania, Moldova. Euro-Med: Turkey, Central and Eastern Europe, Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestinian Authority, Syria, Tunisia. Source: Based on Comext database decline in the level of clothing exports to EU15 markets during the 1990s and early 2000s, exports burgeoned in Romania and Bulgaria (Figure 4). A wave of crises was also experienced around the 2005 quota phase-out, with Romanian clothing exports falling precipitously, although recovering immediately following the 2008 global economic crisis. Polish clothing exports, once written off as a fading industry, have returned to positive growth since 2006, as they have also following the economic crisis in Romania and Bulgaria. The incorporation of proximate assembly producers in low-wage countries on the margins of the EU was part of a broader EU strategy of labour market reform orchestrated under pressure from large industry and retailer associations. As these fractions of western European capital sought to extend the frontiers of accumulation opportunity by eastwards expansion, national and EU policies created ever more conducive policy frameworks for them. This so-called ‘golden bands’ approach was a driving motif for both enlargement and trade integration in and beyond Europe. The EU market became embedded within ‘three golden bands’ of clothing production and exports, which were increasingly important to the accumulation strategies of western European industrial and retail capital in the clothing sector: core EU/European, central European and North African and wider eastern European locations. Beyond these three Adrian Smith and John Pickles 330 Foreign investment in eastern and southern Europe Figure 4 Clothing exports from selected central and eastern Europe suppliers to EU15 markets, 1995–2012 Source: Based on Comext database 0 500 1000 1500 2000 2500 3000 3500 4000 Bulgaria Czechia Hungary Poland Romania Slovakia Va lu e of E U 15 im po rt s fr om E CE 6 (E ur os , m ill io ns ) 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 Integration in the euro zone, membership of the EU and wage pressures were connected to expectations about future national economic growth and the ability of labour to leverage wage increases. Together these forces generated intense pressure on factory managers to increase wages during the mid-2000s. The managing director of one large, former state-owned enterprise in eastern Slovakia, for example, estimated that wage inflation (despite the fact that clothing workers remained the lowest paid of all manufacturing employees) and currency appreciation increased total operating costs by 22 per cent in 2008 alone.12 This was compounded by the loss of workers from labour-intensive industries as both migration to EU15 states and sectoral restructuring increased, particularly as small firm development and shifts into tertiary sector employment became more important (see also Plank et al. 2009). Despite the fact that for many workers the expected benefits of migration to the EU15 were not always realised,13 out-migration and sectoral restructuring both served to create a situation in which factory managers found themselves having to provide additional wage and non-wage benefits in order to deal with a tightening labour market for clothing workers. The global economic crisis had a significant impact on these regional production systems, as core markets in Western Europe contracted and orders were lost. According to data from EURATEX,14 2008 and 2009 EU household consumption in textiles and clothing fell for the first time in seven years, and 2011 consumption remained below the level of 2007. The economic crisis increased pressure on the industry, which in the case of Slovakia led to a significant reduction in exports to core markets in EU15 countries. This was accompanied by extensive downsizing and bankruptcy in the industry, estimated to have resulted in the loss of approximately 12,000 jobs since 2005. During the height of the economic crisis, national production fell by 36 per cent in textiles and clothing at the lowest point in February 2009 and by 10.7 per cent in 2009 as a whole (compared with 2008). Exports to the main EU15 markets fell by 7 per cent between 2007 and 2008 and did not return to early 2008 levels.15 Overall, Slovakia’s share of the EU15 clothing market fell from 1 per cent in 1995 to 0.5 per Global value chains and business models in the central and eastern European clothing industry 333Foreign investment in eastern and southern Europe 12. Interview with managing director, former state-owned enterprise, Michalovce, October 2009. 13. Interview with senior manager, German-Slovak joint venture, Prešov, June 2008. 14. Interview with senior personnel, EURATEX, Brussels, July 2012. 15. Industrial production data for February 2009 are derived from ŠÚSR (2009a) and for 2009 as a whole from ŠÚSR (2009b). Trade data are extracted from Comext, the Eurostat trade database. cent in 2011, although – as we note later – there are certain product niches that have proved very resistant to these wider changes. What these transformations mean for the sustainability of labour- intensive clothing production in Slovakia and more generally across central and eastern Europe remains an open question, but the reliance on a model of development wedded to EU15 export markets integrated through European production networks exposed producers across the region to demand-side shocks (Smith and Swain 2010). Export demand in some sectors of Slovakian industry has started to rebound, mainly in electronics, machinery and transport equipment (ŠÚSR 2010), but sectoral restructuring and the broader recomposition of the economy are creating new opportunities for workers to put further pressure on clothing firm managers who are trying to retain their workers, with important regional consequences. In the following section we turn to regional trajectories in the clothing industry and their relationship to the business strategies of lead firms in wider production networks. 5. Foreign investment and regional trajectories in the Slovak clothing industry In the context of these changing competitive pressures in the clothing industry in this section we examine some of the ways in which regional economies are being re-positioned and the primary business strategy drivers of these changes. It documents an eastward regional shift in the industry, which occurred from the mid-1990s to the crisis of 2007, during the period of intense trade liberalisation and EU enlargement. It also explores the implications of liberalisation and enlargement for employment levels and worker livelihoods in the main centres of production. Our argument is that foreign ownership of firms and deep integration into western European production networks and corporate structures have been central to determining the sustainability of key firms during a period of intensifying competitive pressure and decline in core markets. While overall levels of FDI in the textiles and clothing industry remain relatively low across central and eastern Europe (with the exception of Bulgaria and Romania; Figure 5), there are important firm- level and sub-national regional concentrations of FDI. Firms with significant levels of foreign investment and joint ownership have had some success in sustaining employment, benefiting from inter-firm learning and investment, and have been able to reposition themselves in Adrian Smith and John Pickles 334 Foreign investment in eastern and southern Europe international markets as competitive pressures increased, resulting in some stability in product-level export profiles. This contrasts with the more precarious position of firms which operate as contract manufacturers for western buyers who have not developed a deeper engagement with the region. At national level, the Slovak clothing industry has seen a steady loss of employment since 2000. The biggest decline in district-level clothing employment occurred in the main centres located in western and central Slovakia, where wage costs have tended to be highest and increasing, although employment decline has also been occurring in some lower cost regions of east Slovakia.16 Several of the main districts in western and central Slovakia have seen an almost complete collapse of employment in the sector. For example, the district of Trenčín, which used to be known as the ‘fashion capital’ of Slovakia, dropped from being the second most important employer of clothing workers in 1997 to twenty-fourth position in 2007, as 92 per cent of employment in the sector was lost.17 This was associated with significant downsizing of production and employment in Global value chains and business models in the central and eastern European clothing industry 335Foreign investment in eastern and southern Europe Figure 5 Stock of FDI in the central and eastern European textiles and clothing industry, 2008–12 (million euros) Source: Eurostat 0 100 200 300 400 500 600 700 800 Bu lg ar ia Cz ec hi a Es to ni a Cr oa tia La tv ia Li th ua ni a H un ga ry Po la nd Ro m an ia Sl ov en ia Sl ov ak ia 2008 2009 2010 2011 2012 10% of manuf. FDI 2% of manuf. FDI 1% of manuf. FDI 4% of manuf. FDI 16. These districts are Trnava, Trenčín, Banská Bystrica, Revúca, Žilina and Púchov. Two of the districts experiencing the largest decline (Trenčín and Banská Bystrica) also experienced the highest percentage wage increase between 1997 and 2007. 17. Between 2007 and 2011 there was modest growth of clothing employment in the region. border in western Ukraine (Smith et al. 2008; Pickles and Smith 2016) enabled the development of close production arrangements with the Italian market. This has also meant increasing local economic dependency on the factory as the main local employer. The local industrial structure in this primarily rural region is highly dependent on the industry, with 67 per cent of local manufacturing employment in the clothing industry. However, even this proximity to foreign buyers in production networks is coming under pressure and some job losses are occurring, particularly among factories in the sub-contracting network used to sustain production at peak times.20 Foreign ownership of firms is important to their ability to sustain employment levels. Such linkages provide organisational knowledge and capacities, as well as links to key EU markets. As a result, they have deeper levels of integration in European production networks than is found in other districts. The main examples of FDI have enabled relatively stable employment levels in relatively peripheral districts. These firms have benefitted from close relations and joint ventures with Italian and German buyers, which have enabled factories to sustain production as preferred suppliers, and to work with their respective Italian and German partners to respond to increasing cost pressures by deciding to out-source elements of production, notably in a set of emergent cross-border relations with factories in western Ukraine. Close buyer proximity also allowed for sustaining year-round orders, and thereby reduced seasonal fluctuations, provided greater financial stability to producers and enabled product upgrading through shifts into new product areas to diversify firm portfolios.21 Geographical proximity to the main market also underpinned the survival of these firms: as one managing director argued, ‘our one advantage compared to Asia is that we are able to react [to orders] in two weeks, sometimes within one week, and when this flexibility is combined Adrian Smith and John Pickles 338 Foreign investment in eastern and southern Europe 20. Interview with joint owner, small clothing producer, Prešov, October 2009. This firm’s employment in the district continued to decline over the late 2000s and early 2010s and is estimated now to be around 300 employees primarily involved in finishing work (labelling and packaging) for production from Ukraine. 21. For example, in one firm a shift into women’s trouser production had been agreed with the German joint venture partner and main customer so that the firm continued to produce men’s trousers as it had for nearly twenty years but diversified into this new segment to provide greater financial stability and to build on its emerging production capacity in western Ukraine (interview with senior manager, German-Slovak joint venture, Prešov, October 2009). Another example, involving a process of shifting into new activity has involved an Italian-Slovak joint venture manager establishing leisure industry activity in the local area (interview with managing director, Italian-Slovak joint venture, Prešov, October 2009). with quality in terms of both sewing and finishing [colour-fastness and washing specificities], we are more competitive’.22 Forms of process upgrading have also been introduced in some of these firms to increase production flexibility to meet the demands of quick response supply and fast fashion from buyers, even in segments such as tailored suits. In order to deal with reduced stock inventory among retailers, joint venture firms have been able to adopt quick response approaches to supply orders in two to three weeks.23 As noted by Plank et al. (2009), higher value production has provided producers with some flexibility to manage the increasing cost and competitive pressures that all firms have been experiencing. However, where this has also taken place in a context of an unrelenting attention to cost reduction, even in some of these more successful firms that have been able to sustain regional export production worker benefits have recently been eroded to keep cost increases as low as possible.24 Not surprisingly, the extent to which such suppliers have been able to reposition from a situation of being ‘captive suppliers’ to more relational forms of interaction with their main customers is limited (see Gereffi et al. 2005). Some greater func tional downgrading of tasks to suppliers has occurred (especially washing, packaging, labelling, quality control), but other key functions – such as design and fabric sourcing – remain largely the responsibility of the buyer located in western Europe. Designs are provided to the firms electroni - cally for them to complete the garment (cut-make-trim or CMT pro duc tion). As a result, only limited design activity or other higher value added activities have emerged within these firms, posing real limits to firm upgrading. Some firm-level upgrading away from CM and CMT pro - duction has occurred but the ability to break into own brand and own design manufacturing has been limited. The Slovak branches of these foreign firms have been able to exploit their close proximity to Italian and German buyers (who are often direct owners or co-owners) and their particular product niche (high quality men’s trousers, suits and shirts, and women’s pantyhose) in order to ensure some stability in orders and exports during a period of dramatic tightening of competitive pressure. Global value chains and business models in the central and eastern European clothing industry 339Foreign investment in eastern and southern Europe 22. Interview with senior manager, German-Slovak joint venture, Prešov, October 2009. 23. In one Italian-Slovak joint venture firm, quick response–tailored garment manufacturing accounted for up to one-third of production in 2009 (interview with managing director, Italian-Slovak joint venture, Prešov, October 2009). 24. In one firm this involved the cancellation of several employee benefits including free massage and sauna usage and subsidised vacations and other leisure activities, and reduced pension benefits (interview with senior manager, German-Slovak joint venture, Prešov, October 2009). By contrast, many domestically-owned firms lacking such market proximity have struggled. This has especially been the case for some of the large former state-owned firms, even when they have occupied a similar product niche in export production. At times this has been due to particular forms of ownership and management relations, including the asset-stripping of some key firms, leading to branch plant closure or a loss of key markets and orders. As the general director of one large, former state-owned enterprise argued, ‘our mistake was that we focused on export markets and not so much on the domestic market’.25 Faced with a significant increase in costs due to wage increases and currency appreciation, this firm lost its key orders from long-standing western European buyers. As a result, total employment in the firm fell from 1,300 in 2002 to 700 in 2005, and 260 in 2010. It is doubtful that a focus on the relatively small domestic market would have improved this firm’s prospects; rather it was their lack of close connections to other foreign buyers that resulted in declining orders as the firm could not meet the price requirements of their main buyers. Increasing wage levels, the attendant increasing costs of production in central and western Slovakia and exchange rate appreciation have underpinned the decline of some segments of the clothing industry in this part of the country. As western and central regions declined in the late 1990s and early 2000s, clothing employment in eastern Slovakia stabilised. More recently these regional production complexes have suffered from increasing wage pressure, exchange rate appreciation prior to joining the euro zone, sectoral restructuring into new industrial activity – such as electronics and automobile production – and increasing tertiary sector activity. On top of this comes the impact of the global economic crisis and the resulting demand slumps in core markets (discussed further in the following section). These cost pressures have been articulated with a set of firm organisational structures that have contributed to the range of trajectories identified. Many of the large former state-owned firms that were at the core of the outward processing trade systems developed from the 1980s onwards have experienced increasing competitive pressures and the loss of key orders from main customers in EU15 markets. Those that have been able to forge connections with western buyers through joint ventures or buy-outs have weathered this storm more easily, partly by having privileged access to western buyers and markets. However, those Adrian Smith and John Pickles 340 Foreign investment in eastern and southern Europe 25. Interview, general director, large former state-owned enterprise, Michalovce, October 2009). bifurcation of experience between non-unionised new firms and former state-owned factories. They found that in factories where unionisation rates were high, workers benefited from wage and non-wage conditions that had their roots in state socialism. Firm managements retained the social wage partly because of continuing trade union presence and the social pact between the union and management, and partly because of the increasingly tight labour markets as skilled workers have been recruited away to other factories which are perceived to have longer term prospects than former state-owned firms or have left the industry for higher-paying jobs in other sectors. Continuing commitments to the social wage enabled management to maintain some workforce stability and thereby guarantee in-factory skill capacities, but also put pressure on factory cost structures at a time when contract prices are being squeezed downwards. One way in which some of the larger clothing enterprises – including both former state-owned and newly established factories – have been dealing with these pressures is to provide extra support to sustain core workers, while also engaging in secondary outsourcing to lower-cost producers in countries such as Ukraine (see above). In conditions in which regional unemployment levels are increasing, clothing factories are still finding it difficult to recruit skilled and trained workers. In part this is due to the relative attractiveness of employment in other sectors compared with clothing, and the loss of employees to other EU countries following enlargement. This is in contrast to the period prior to EU enlargement when clothing production sustained many local economies based on former state-owned enterprises and alternative job opportunities for clothing workers were more limited.27 The increasing relative tightness of labour markets in the clothing sector has also been connected to a steady erosion of training and apprenticeship opportunities across Slovakia in the textiles and clothing sectors, leading to erosion in the supply of skilled workers.28 Workers were choosing other employment opportunities but together these forces have meant that clothing workers were able to establish certain enhancement to working conditions and benefits as labour markets tightened and at the same time as the industry was facing increasing competitive pressure. The ability of workers to leverage improvements in wage levels and working conditions even during the economic crisis and a period of Global value chains and business models in the central and eastern European clothing industry 343Foreign investment in eastern and southern Europe 27. Interview with head of trade union, former state-owned enterprise, Púchov, November 2003. 28. Interview with director, Stredné odborné učilište, Trenčín, November 2003. tightening competitive pressure is illustrated by the week-long strike in August 2010 by clothing workers in two Italian-owned factories in the Vranov nad Topľou district in east Slovakia, resulting in a 15 per cent increase in wages, partly related to performance.29 The timing of the growth of wage pressure coincided with the government’s increases in the national monthly minimum wage in October 2006 (Barošová 2007) and in January 2010. In labour-intensive industries such as clothing, these minimum wage increases were impor - tant to sustain workers’ wages, but also affected firm competitive ness in the wider context of liberalisation.30 The implications of these pressures became even clearer in the context of the global economic crisis. The increasing fragility of contracting relations and supply chains during the crisis in a liberalised trade environment became apparent as the industry witnessed increasing pressure on contracting prices and as the volume of orders was reduced. Interview evidence has highlighted the tightening of contract prices across the industry, notably during the economic crisis.31 In a number of key examples, the inability of producers to meet tighter pricing of contracts from western European buyers has meant a significant loss of orders, reductions in employment and closure of branch plants (see also Doktor 2009). Consequently, the positional power of workers which had enabled the leveraging of improved wage and other payments is fragile given the wider structural logics of contracting in the global clothing industry. Moments of change that enabled the leveraging of improvements for workers in terms of social wage benefits, the minimum wage and wider social conditions (provision of subsidised or free transportation) have come rapidly undone in the context of the global economic crisis as firms were either unable to survive or moved eastwards as they sought out new contracting opportunities. Firms in global value chains that involved a strategic partnership with a foreign joint venture partner generally withstood these crises more readily than firms operating for domestic markets or those with more Adrian Smith and John Pickles 344 Foreign investment in eastern and southern Europe 29. See Buzinkay (2010a, 2010b) and Anon (2010). These two firms, only established in spring 2010, are owned by Italian investors also associated with another local clothing firm with a major interest in nearby Humenné. 30. Interview, general director, large former state-owned enterprise, Michalovce, October 2009. 31. For example, interviews with managing director, major retailer and franchise company, eastern Slovakia, 2008 and with senior manager, German-Slovak joint venture, Prešov, 2008 and 2009. tenuous contractual relations with buyers. But participation in global value chains created its own problems, as such producers were often being constrained by outward processing trade and rules of origin requirements and, as a result, had limited opportunities for upgrading. In this sense, participation in global value chains, far from fostering inter- firm learning (as it had done in the 1990s and early 2000s), exacerbated the effects of the crises of the late 2000s and constrained the options available to resolve them. In some cases, upgrading of production processes involving shifts into retailing and brand development were accompanied by flexible business strategies and generated success until the financial crises undermined cash-flow and led to bankruptcy independently of profitability.32 The impact that this restructuring is having on worker livelihoods is clear with increasing levels of regional unemployment; increasing pressure on firms is being translated into job losses and downward pressure on wages relative to other manufacturing wages,33 with consequences for the workers in terms of increasing labour market precariousness. 6. Conclusions The global economic crisis has radically transformed worker livelihoods and firm competitiveness across central and eastern Europe, especially in the clothing industry, which had been one of the mainstays of industrial and regional resilience in late socialism and during the first 15 or so years of post-socialist transformation. This rapid transformation is taking the form of increasing mass unemployment and precariousness among workers in the context of the global economic crisis. In Slovakia, the industry is being sustained in smaller numbers and specific locations, usually in circumstances in which close relations with EU15 buyers through joint ventures and FDI have been established, and where particular product- and market-niches have been established, particularly in higher quality and higher value products (Pickles and Smith 2011; see also Plank et al. 2009: 30–31). In other national contexts evidence suggests that the resumption of export growth in recent years has been accompanied by continuing employment decline, suggesting an emerging pattern of jobless growth. Global value chains and business models in the central and eastern European clothing industry 345Foreign investment in eastern and southern Europe 32. Interviews with managing director, major brand clothing retailer, eastern Slovakia, 2008. 33. Between 2000 and 2010, average monthly wages in textiles and clothing relative to average manufacturing industry wages dropped from 71 per cent to 65 per cent and were consistently the lowest among all manufacturing industry branches (490 euros in May 2010). Pickles J., Buček M., Pástor R. and Begg B. (2014) ‘The political economy of global production networks: regional industrial change and differential upgrading in the East European clothing industry’, Journal of Economic Geography doi:10.1093/jeg/lbt039. Arguments presented here are elaborated more fully in Pickles J. and Smith A. (with Begg R., Buček M., Roukova P. and Pástor R.) (2016) Articulations of Capital: Global Production Networks and Regional Transformations, Oxford, Wiley. References Abernathy F., Volpe A. and Weil D. 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