Determinants of Subcontracting and Firm Performance in Lao PDR: Evidence from a Garment Industry Cluster

Abstract

Subcontracting plays an important role in economic development and employment creation. It also has been regarded as the main source of efficiency and competitiveness. The main reasons of subcontracting relations are that large firms seek to gain lower labor cost advantage from small firms (dualistic and developmental approaches) and/or they can gain collective efficiency through cooperation in terms of technology, production and marketing (networks/clusters approach). The paper estimates subcontract offering and subcontract receiving firms and their impact on firm performance for Lao garment industry by using data from a field survey. We construct probit and multiple regression analyses to examine the hypotheses. The findings indicate that both unequal and equal relationships exist between clients and subcontractors. Large firms play the role in being clients while small firms tend to be subcontractors. Moreover, wages are not different among clients and subcontractors. This means that network/cluster type of subcontracting also exists in Lao garment industry.

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