Determinants of Subcontracting in Lao Garment Industry

Abstract

Subcontracting firms play an important role in industrial development. One of the main reasons is that large firms subcontract small and medium-sized enterprises and by doing so, large firms can enjoy the advantage of lower wage of small firms (traditional approach) and/or they can enjoy the lower transaction cost from inter-firm cooperation in terms of technology, production and marketing (modern approach). This study aims at investigating the determinants of 42 subcontractors’ behaviors in Lao garment industry. We utilize probit model in analyzing data from the field survey. The results of analysis follow modern subcontracting approach. Traditional subcontracting relation that has been simplified as the relationship between high wage firms employing male workers and low wage firms employing female workers is not important factor in explaining subcontracting behaviors of Lao garment industry. Rather, modern subcontracting relation approach matters much more in this industry. Keywords: Subcontracting, Garment Industry, Probit Model, Lao PDR