Journal of Business & Economics Research January 2008 Volume 6, Number 1

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1 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 Techncal Change And Growth In The Textle Industry: The Nonwoven Sector Susan Chrstoffersen, (Emal: Chrstoffersens@PhlaU.edu), Phladelpha Unversty Anusua Datta, (Emal: DattaA@PhlaU.edu), Phladelpha Unversty ABSTRACT We examne the performance of a growng sector of the textle ndustry: nonwoven fabrc mlls. Ths sector s emergng from what was once a margnal manufacturng sector to become ncreasngly a focus for the future of textles n the US. From dsposable dapers to bleach wpes, medcal apparel to house wrappng, new products are enterng the market; these products are made possble by technologcal advancements n adheson technques, fber modfcatons and delvery advancements. In order to better understand these sgnfcant ndustry dynamcs, we estmate a translog cost functon to calculate the elastcty of substtuton between captal, labor, energy and materals and to see how these change over tme. Addtonally, we track trends n the elastcty of scale and the mpact of technologcal change. Textle manufacturng n the Unted States s shftng away from commodty products and the nnovatve nonwovens sector provdes a much needed exemplar for future textle manufacturng. INTRODUCTION D re news regardng the U.S. textle ndustry s manfest. At the aggregate ndustry level, many of these clams are correct. However, a very dfferent pcture emerges from data from the ndvdual sectors of the textle ndustry where there s tremendous creatve energy. Levnsohn and Petropolous (001) present the ndustry as an example of creatve destructon", a term made famous by Joseph Schumpeter. Hs dea s that the creaton of new products and producton methods lead to the destructon of market share for frms commtted to exstng paradgms. The evoluton of the nonwoven sector n the last thrty years has certanly been creatve and s changng textle manufacturng n the Unted States. THE NONWOVEN MANUFACTURING SECTOR The Importance Of The Nonwovens Sector The textle ndustry s an mportant manufacturng sector; t contrbuted close to $69 bllon to GDP n 005 (BEA, 007); n certan regons of the Unted States, t s the predomnant employer although those numbers are declnng. Wthn the textle ndustry, the nonwovens sector s dstngushed for ts growth; ths s n contrast to many other textle sectors. In 00, the sector employed more than 1,000 employees (Census, 007) 1 at average wage rates above the typcal textle worker. The followng graph, Fgure 1, tracks the changes n employment from 1958 through The US Census Bureau conducts surveys every 5 years, the next survey wll be dstrbuted Dec. 007, makng data from 00 the most current. The graphs show data untl 1996 as the Standard Industral Code (SIC) was replaced at that tme by the North Amercan Industral Classfcaton System (NAICS) whch does not yet contan enough years to perform sgnfcant statstcs. SIC 97s not equvalent to NAICS as the later also contans data for mscellaneous textles, SIC

2 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 Fgure 1: Employment Trends (thousands) Employment n the Nonwoven Sector The number of frms enterng the ndustry contnues to grow as does sales volume, measured by value of shpments n Fgure, as new uses of nonwovens contnue to be developed. Fgure : Output of Nonwoven Sector (mllons) Value of Shpments by the Nonwoven Sector Source: NBER Manufacturng Productvty Database The followng table shows these trends relatve to the textle ndustry as a whole. 18

3 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 Fgure 3: Growth of the Nonwovens Sector Source: NBER Manufacturng Productvty Database Evoluton Of Nonwoven Products And Producton Costs In the 1950 s, the Kendall Co. produced a nonwoven cotton cloth to clean photographc plates that was superor to the rolled cotton used prevously. In the early 1970 s, growth accelerated due to process nnovatons that lead to the ntroducton of dsposable dapers. (source?). Later, the nonwovens sector ncluded molded car nterors, house wrap, ndustral and medcal apparel. Products evolve as the cost, performance and product characterstcs beneft from technologcal advances n formaton processes. At the same tme that producton processes and products were swftly evolvng, energy and labor prces were also ncreasng, outpacng ncreases n the fnal prces for output. The chart below hghlghts these prce pressures. Fgure 3: Prce Indces for Nonwovens Source: Bureau of Labor Statstcs, 19

4 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 The prce ndex for labor shows the greatest ncrease over the perod. The second greatest ncrease s n the prce of energy, whch s also the most varable, however not a sgnfcant share of the overall cost structure facng the frm, as llustrated n the followng chart. Smlarly, the ncrease n the prce of nvestment n captal s large but agan not a large expendture relatve to total costs. The most modest prce ncrease s for the fnal product; good news for the consumer but not the manufacturer. Nonwoven prces for the fnal goods ncreased by 196% whle overall, the cost of commodtes ncreased 305.8% between 1965 and 00 (Carpet & Rug Insttute, 003). Whle these profles are not uncommon wthn the textle ndustry, there are two substantal dfferences n the nonwovens sector. Frst, the cost of materal very closely tracks the prce ndex for shpments (the prce of the fnal product). The general pattern n textles s for materal costs to ncrease by much more than output prces. Secondly, the captal ntensve manufacturng protects the nonwovens sector from much of the competton from abroad. Governments of developng countres tend to avod subsdzng ndustres requrng large captal nvestments and small workforces; they generally have the objectve of ncreasng employment opportuntes for ther labor force. The followng chart shows the mportance of materals n the cost structure. Fgure 4: Sum of Costs and Value Added Labor Materal Captal Energy ValueAdded Source: NBER Manufacturng Productvty Database Materal costs went from 65 to 70 percent of the costs of producton, whle labor shfted from 30 to 0 percent of the costs, and the rest s accounted for by energy and captal, whch together went from 5% to 10 % of the total cost of producton. Thus we observe a) large changes n the relatve prces of nputs and b) the mportance of materals n the cost structure of the frm. Rsng labor costs favor the labor-savng technology of the nonwovens processes. Technologcal nnovatons n the producton process contnue to encourage growth n the ndustry wth new product development and product qualty mprovements. We apply econometrc technques to analyze ths sector s success, 0

5 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 partcularly wth regard to changng patterns of nput use, that s, the degree of substtutablty between nputs as costs change, as well as determne the economes of scale. Next, we frst present the theoretcal model and the descrpton of the dataset. Then the econometrc estmaton and analyss of the nonwoven sector provdes nsght for textle manufacturng n the future. ECONOMETRIC ANALYSIS Theoretcal Model We employ the transcendental logarthmc (translog) cost functon to study the producton structure of the nonwoven sector. The translog cost functon developed by Chrstensen, Jorgensen and Lau [1971, 1973] handles multple nputs and allows for varable elastctes of substtuton between these nputs. Ths s preferable to the Cobb-Douglas and constant elastcty of substtuton (CES) producton functons that only allow us to analyze two nputs, usually captal and labor, and restrct the elastcty parameters to sum to unty (Cobb-Douglas) or be constant (CES). Assumng frms mnmze total costs of producton, the general form of the aggregate cost functon can be represented as mn C = G(P K, P L, P E, P M, Q, T) (1) where producton cost (C), s expressed as a functon of the prces of nputs (captal, labor, energy, materals), the level of output (Q) and techncal change (T). The general form of the cost functon s expressed n ts translog form [Chrstensen et al. (1973)] as ln C 0 q ln Q ln 1 j j ln t ln P T P ln P P j 1 qq (ln Q) q qt ln QT t T ln P 1 ln Q tt T () where,j = K,L,E,M, and α, β, γ, Ɵ are the parameters to be estmated. To streamlne the exposton, econometrc specfcs are artculated separately n the followng sectons of the econometrc results, and n full n the appendx. The model s estmated usng the teratve Zellner procedure for seemngly unrelated regressons usng the RATS software. The estmated cost functon s a mult-nput, non-homothetc functon, whch allows for nonconstant returns to scale, non-neutral techncal progress and varable elastcty of substtuton. Data Sources Ths study s based on data for the perod Data on cost and prces of labor, captal servce, energy, non-energy materals and real output for nonwoven textles (SIC 97) are taken from the Bureau of Labor Statstcs Multfactor Productvty database. Total cost s computed as the total of labor, captal, energy and materal cost. Usng ths data to estmate the parameters of the cost functon allow us to nvestgate the sources of growth for the nonwovens sector. Specfcally, we nvestgate whether ths sector was able to take advantage of economes of scale and how techncal change over tme has altered the optmal combnaton and level of nputs. For a detaled dscusson see Fuss, McFadden and Mundlak (1978), pp. 4-5, and Lau (1986), pp

6 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 Econometrc Estmaton And Analyss Economes of Scale Scale economes (SE) are measured as the recprocal of elastcty of cost ( cost wth respect to output, holdng nput prces and technology constant ln C ln Q 1 SE ln P ln Q T 1 q q qq CQ ) or the percentage change n (3) Constant returns to scale are ndcated by SE = 1; costs ncrease n drect proporton to output. Decreasng returns to scale are ndcated by a parameter value SE < 1, that s, costs ncrease more than proportonate to the ncrease n output. Our estmates yeld the followng results. Economes of Scale Year Economes of Scale We observe decreasng returns to scale n the nonwoven sector up untl the 1970 s. Before the 1970 s, one would expect frms to be operatng at full capacty; expanson causng pressure on the costs. After 1975, however, we see a transformaton; SE >1, mplyng ncreasng returns to scale. There s suffcent capacty that f the frm expands the scale of operaton, they would experence fallng per unt costs consstent wth a captal ntensve ndustry, requrng large fxed costs. The ndustry became more effcent between 1978 and 1996, as demand for the nonwoven products grew and mass producton allows the frms to take advantage of the scale economes. Techncal Change The rate of techncal change (TC) equals the negatve of the rate of growth of total cost wth respect to tme, holdng output and prces of all nputs constant. In terms of the translog cost functon, the rate of techncal change s measured as, TC C / T t t ln P qt ln Q ttt ln (4)

7 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 In equaton (4) the parameters and t >0, t mples costs decrease over tme at an ncreasng rate, whle tt at the decreasng rate. ' s f t 0 and factor usng f 0. t measure neutral shfts n the cost functon. Thus f tt <0 and t <0 mples costs decrease but <0 and t tt measure the bases n techncal progress. Techncal change s th factor savng Both and are negatve and sgnfcant n our model estmates (Table 1, appendx), whch ndcates t tt that producton costs are gong down over tme n the nonwoven sector, but at a decreasng rate. The rate of techncal progress for the sample perod averages around 0.4%. Ths ncludes perods of negatve techncal progress (ncreasng costs) n the late 1970s and md-1980s, possbly representng perods of energy prce shocks and captal nvestment (see chart below). Techncal Change Year Techncal Change For ths sector we fnd 0 and 0 whch ndcate captal-savng and energy usng techncal KT ET progress. An ncrease n the prce of captal encourages the substtuton of other nputs whch makes the adopton of captal-savng technology more cost effectve; ths may be attrbuted to the growng mportance of materal and labor n the cost structure. Agan we see a shft n technology takng place around 1970; the energy usng component may be attrbuted to the ncreased fuel prces at the tme. Elastctes of Substtuton The cost functon also yelds drect estmates of the varous Allen-Uzawa elastctes of substtuton. These parameters are the key to descrbng the pattern and degree of substtutablty and complementarty between the factors of producton. The Allen-Uzawa partal elastctes of substtuton between two factors and j, j, can be computed drectly from the translog cost functon [Nadr and Schankerman, 1981]. js Sj j S S j ; for j (5) 3

8 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 Havng four nputs (labor, materals, captal and energy) creates sx pars for whch we estmate elastctes of substtuton. To present the results n as clear a manner possble, we segment the elastctes by whether or not energy s n the par. A postve elastcty ndcates that the nputs are substtutes, a negatve estmate ndcates complements. Substtuton Elastctes: Energy Year Energy-Materal Energy-Labor Energy-Captal Once agan a change n technology s n evdence n the early 1970 s, energy and materals swtch from complements to substtutes. Prevous to 1974, f one were to ncrease producton, usng more labor or materal, one would necessarly use more energy. After 1974, one could substtute more captal or materal for energy, perhaps ndcatng new energy savng captal nvestment. Substtuton Elastctes: Non-Energy Year Materal-Labor Materal-Captal Labor-Captal 4

9 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 Whle materal and captal reman hghly substtutable, substtuton elastcty between materal and labor declnes n producton. Ths perod covers a technologcal transton to greater degrees of captal ntensty n producton. As fewer workers are nvolved wth the producton process, they are more crtcal and less substtutable for other nputs. The hgh degree of substtutablty between materals and captal mght at frst blush seem counterntutve; how can one use more machnes and less fber to acheve a certan level of producton? Could one produce the same amount of sweaters, for example, wth more looms and less wool? The degree to whch captal and materal are not complements perhaps reflects the ablty of the ndustry to outsource; that s to make or buy. If they are makng the ntermedate nputs, they nvest n captal; f the prces shft, an agle manufacturer buys the ntermedate nputs (materal), thereby substtutng materal for captal. CONCLUSIONS Clearly there has been a fundamental transformaton n the nonwovens sector. We attrbute ths to both product and process nnovatons. Exstng products are beng mproved (dapers) and new products are contnually arsng (Clean-up wpes). Ths s clearly reflected n the data. After 1975, there s a shft to ncreasng returns to scale n producton; there s suffcent capacty that as the scale of operaton expands, unt costs fall, consstent wth mass producton and the large fxed costs of hgh tech producton. Process nnovatons are evdenced by a shft n technology takng place around 1970 wth the growng mportance of materal and labor n the cost structure. At the same tme, energy and materals swtch from complements to substtutes. After 1974, one could substtute more captal or materal for energy, perhaps ndcatng new energy savng captal nvestment. Materal and labor become less substtutable n producton; there s a greater degree of captal ntensty n producton so as fewer workers are nvolved, they are more crtcal and less substtutable for other nputs. One would expect captal and materal to be used together (complements) but they are substtutes. Ths reflects the ablty of the ndustry to outsource; that s the make or buy decson. Nonwovens, a growng sector of the textle ndustry, s a paradgm for growth; t exemplfes the value of nnovaton n an ndustry often mstakenly dsmssed as old manufacturng. ACKNOWLEDGEMENTS Ths research was supported by grants from the Natonal Textle Center. We gratefully acknowledge ther support as well as the support of Phladelpha Unversty. We thank Mkhal Koulavtsev (Stephen F. Austn State Unversty) and faculty members at Phladelpha Unversty s School of Busness Admnstraton; they were most helpful. All errors reman our own. REFERENCES 1. ATMI (001, August). Crss n U.S. Textles. Report: Offce of the Chef Economst and the Internatonal Trade Dvson of the Amercan Textle Manufacturers Insttute.. Bartlesman, E.J. and W. Gray The NBER Manufacturng Productvty Database. NBER Techncal Workng Paper Carpet & Rug Insttute Sustanablty Report ch.vii Economcs. 4. Clne, Wllam R The Future of World Trade n Textles and Apparel, Insttute of Internatonal Economcs, Washngton, D.C. 5. Chmura, C The Textle and Apparel Industres: Technologcal Transton. Cross Secton, (): 1, 5, 1 (Federal Reserve Bank of Rchmond). 6. Chrstensen, L.R., D.W. Jorgensen and L.J. Lau Conjugate Dualty and the Transcendental Logarthmc Producton Functon. Econometrca, 39: Chrstensen, L.R., D.W. Jorgensen and L.J. Lau Transcendental Logarthmc Producton Fronters. Revew of Economcs and Statstcs, 55(1):

10 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 8. Chrstoffersen, S. and A. Datta The Changng Structure of U.S. Textles: Productvty Implcatons. Journal of Busness and Economc Studes. 9. Datta, A Dvestture and Its Implcatons for Innovaton and Productvty Growth n U.S. Telecommuncatons. Southern Economc Journal, 69(3): Dewert, W. E An Applcaton of Shephard s Dualty Theorem: A Generalzed Leontef Producton Functon. Journal of Poltcal Economy, 79(3): Farchld s Textle and Apparel Fnancal Drectory (1989/1990). New York: Book Dvson, Farchld Publcatons. 1. Fuss, M.A., D.L. McFadden and Y. Mundlak A Survey of Functonal Forms n the Economc Analyss of Producton, n Fuss and McFadden eds. Producton Economcs: A Dual Approach to Theory and Applcatons, Vol. 1, North Holland: Amsterdam, pp Kmenta, J. and R. Glbert Small Sample Propertes of Alternatve Estmators of Seemngly Unrelated Regressons. Journal of Amercan Statstcal Assocaton, 63: Lau, L.J Functonal Forms n Econometrc Model Buldng, n Grlches and Intrlgator eds. Handbook of Econometrcs, Vol 3, North Holland: Amsterdam. 15. Levnsohn J. and W. Petropolous, 001. Creatve destructon or just plan destructon? The U.S. Textle and Apparel Industres Snce 197, NBER, Workng Paper 5348, Cambrdge, MA. 16. Nadr, M.I. and M.A. Schankerman The Structure of Producton, Technologcal Change and the Rate of Growth of Total Factor Productvty n the U.S. Bell System, n Cowng and Stevenson, eds. Productvty Measurement n Regulated Industres, Academc Press: New York, pp Morrson Paul, C. J Cost Economes: A Drvng Force for Consoldaton and Concentraton? Southern Economc Journal, 70(1): Ramcharran, H. 001 a. Estmatng Productvty and Returns to Scale n the U.S. Textle Industry, Emprcal Economcs, 6(3): The Economst Specal Report: The textle ndustry: The loomng revoluton. November Improved Annual Industry Accounts for : Integrated Annual Input-Output Accounts and Gross- Domestc-Product-by-Industry Accounts. (by Moyer, B.C., M.A. Plantng, P.V. Kern, and A.M. Ksh): p U.S. Bureau of Economc Analyss. June 007 Integrated Annual Input-Output Accounts and Gross- Domestc-Output-by-Industry Accounts. Vnod, H.D Non-Homogeneous Producton Functons and Applcatons to Telecommuncatons. Bell Journal of Economcs and Management Scence, 3: Xa, Y. and S. Buccola Factor Use and Productvty Change n Alcoholc Beverage Industres, Southern Economc Journal, 70(1): Zellner, A An Effcent Method of Estmatng Seemngly Unrelated Regresson and Tests for Aggregaton Bas. Journal of Amercan Statstcal Assocaton, 57: APPENDIX The cost functon s expressed n ts translog form, a second-order approxmaton to an arbtrary twcedfferentable surface [Chrstensen et al. (1973)]: ln C 1 0 q ln Q ln P qq (ln Q) 1 j j ln P ln P j q ln P ln Q 1 t ln P T qt ln QT t T tt T where,j = K,L,E,M, and α, β, γ, Ɵ are the parameters to be estmated. () For a well-behaved cost functon, lnear homogenety n nput prces and symmetry of the nput-prce Hessan matrx are mposed. 6

11 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 () Lnear homogenety: 1 ; 0 ; 0 ; 0 j q (3) () Symmetry: j j j (4) The total cost functon s estmated wth the cost share equatons obtaned usng Shephard s lemma [Dewert, 1971] 3, by dfferentatng Eq. () wth respect to the nput prces. S ln C ln P 1 ln P j j q ln Q T, j = K, L, E, M (5) where S =P X /C s the share of costs accounted for by factor. The cost share equatons must satsfy the addngup crtera.e. S 1. Scale economes (SC) are measured drectly as the recprocal of elastcty of cost ( CQ ) wth respect to output, ln C ln Q 1 SC ln P ln Q T 1 q q qq (6) whch vary wth relatve factor prces and the levels of output and technology. If SE s greater (less) than unty, cost ncreases less (more) than proportonally, mplyng the exstence of ncreasng (decreasng) returns to scale. The rate of techncal change (TC) equals the negatve of the rate of growth of total cost wth respect to tme, holdng output and prces of all nputs constant. ln C TC t t ln P qt ln Q ttt T In equaton (7), ' s measure the bases n techncal progress. Techncal change s th factor savng f t 0 and factor usng f 0. The parameters and, measure neutral techncal change, characterzed by pure shfts t t tt n the cost functon. The Allen-Uzawa partal elastctes of substtuton between two factors and j, j, and the outputcompensated own- and cross-prce elastctes of factor demand, and j, can be computed drectly from the translog cost functon [Nadr and Schankerman, 1981]. These parameters descrbe the degree of substtutablty and complementarty between the factors of producton. (7) j js Sj S S j S Sj j ; j S S and for j (8) S S The equalty σ j = σ j s ensured by the condton γ j = γ j. Also note that ɛ j =S j σ j. C( q, p) 3 x ( q, p) P, where q represents output level and p s a vector of nput prces. 7

12 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 The addng-up condton for the cost shares n (5) renders the dsturbance covarance matrx to be sngular. Therefore the system of equatons s estmated by deletng one of the share equatons. The model s estmated usng the Iteratve Zellner procedure for seemngly unrelated regressons wth restrtctons (3) and (4) mposed usng the RATS software. Kmenta and Glbert [1968] show that teraton of the Zellner procedure untl convergence yelds maxmum lkelhood estmated whch s nvarant to the choce of equaton deleted. The estmated cost functon s a mult-nput, non-homothetc functon, whch allows for non-constant returns to scale, non-neutral techncal progress and varable elastcty of substtuton. Table 1: Model Estmates Textle-97 Varable Parameter Coeffcent t-statstcs *** *** *** *** ** *** *** *** *** *** * *** * ** *** *** *** *** *** * *** Adjusted R Note: *** sgnfcant at the 0.01level; ** sgnfcant at the 0.05 level; and * sgnfcant at the 0.10 level. 8

13 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 Table : Econometrc Results: Substtuton Elastctes, Scale Economes and Techncal Change SIC 97 Substtuton Elastctes Scale Economes Techncal Change Year σεμ σει σεκ σμι σμκ σικ SE TC Means

14 Journal of Busness & Economcs Research January 008 Volume 6, Number 1 NOTES 30