Innovation Policies and Regional Advantage: A n Analysis on Textile Industry in Denizli, Turkey

1. Innovation Policies and Regional Advantage: An Analysis on Textile Industry in Denizli, Turkey Assoc. Prof. Yaprak Gülcan Dokuz Eylül University, Faculty of Business Assoc. Prof. Yeşim Kuştepeli Dokuz Eylül University, Faculty of Business

2. OUTLINE • 1. INTRODUCTION • 2. TEXTILE INDUSTRY AND POLICY INITIATIVES IN DENİZLİ • 3. SURVEY QUESTIONNAIRE RESULTS • 4. CONCLUSION

3. THE TURKISH CASES

5. 1. Introduction • Competitiveness and its preservation are important in regional development as they help to increase employment opportunities and hence the living standards of a region (Kumral, 2006). • Gardiner (2003) defines the factors that determine regional competitiveness and development as • infrastructure and accessibility, • human resources and • productive employment • Those related to knowledge and innovations under infrastructure and accessibility are deemed to be critical. The indicators for knowledge-innovation process are grouped as • knowledge capital, • innovation capacity, • knowledge economy outputs and • knowledge economy outcomes.

6. As the region’s capacity for creating and transforming new ideas and creating commercial value through managerial, professional and technical personnel increases, the region will be able to produce high value added outputs measured by number of patents and innovations in addition to creating wealth measured by GDP per capita, household income and unemployment rates. • The success of innovation activities of SMEs depends on the integration to local networks, production of local knowledge and knowledge dissemination processes (Asheim, 1996). • Competitiveness and development of regions can be constructed by initially taking into account the differences across regions such as different types of regional innovation systems and modes of governance and thereafter planning and implementing region-sensitive innovation and development policies (Tödtling and Trippl, 2005; Asheim, Coenen, Moodysson and Vang, 2006).

7. Turkey, with its big geographic scale and deteriorating climate conditions from west to the east, is characterized by regional economic disparities. In general, regions in the west are more developed than those in the east; however, there may be underdeveloped cities and villages in the west regions also. • Turkey has lost a lot of time in terms of regional development policies. She has started to implement modern regional policies yet in 2000s with the European Union membership negotiations. • Preliminary National development Plan has been prepared for all regions for 2004-2006 period. Although this document can be considered as a turning point for Turkey, it lacks operational planning and it is weak in resource provision and application coordination. • An important step for regional development policies is realized with the Law 5949 in 2006 for forming regional development agencies for NUTS 2 regions in Turkey (Bilen, 2006).

8. The aim of this study is to investigate the case of textile related industries and activities; specifically towel and bathrobe production, in Denizli province of Turkey in terms of constructing regional advantage with the idea of an innovation based policy. • A sample of 32 firms producing towel and bathrobe are analyzed. In addition, policy initiatives and their contribution to regional growth and innovation are questioned. • Located in the Aegean Region of Turkey, Denizli is highly specialized in textile production. There is strong national and international networking interaction among the SMEs in towel and bathrobe clusters where constructed advantage comes from entrepreneurship (networked regional innovation system) (Aldemir, Akgüngör, Gülcan, 2007). • The data for the analysis is gathered through desktop research and secondary data sources. In-depth interviews are conducted via a structured survey questionnaire to SMEs in towel and bathrobe industry to explore network relations and innovativeness.

9. LINKING OF KNOWLEDGE BASES AND NACE (SIC2002)

10. 2. Textile Industry and Policy Initiatives in Denizli • Textiles and clothing are among the first manufactured products in an industrializing economy. Textiles and clothing sector is claimed to be the driving sector of the Turkish economy. The sector’s share in total industrial manufacturing is around 20 % and it comprises almost 10 % of the total employment in the country in 2004 (Özben, Bulu and Eraslan, 2004). • In the 1990s, a number of Turkish firms in textile industry have acquired enough autonomy to develop and exercise their own strategies, and as original brand-name manufacturers, they became global competitors (Tokatlı, 2003). • In the recent years, Turkish textile industry is focused on becoming more competitive in the global markets by moving production from low value-added products into high value added textiles by utilizing highly skilled and productive Turkish labor force (Özben, Bulu and Eraslan, 2004).

11. Denizli constitutes an important place in textile production in Turkey. With the Fifth Five year Development Plan period (1985-1990), Denizli realized a rapid industrialization process, especially in the textile sector. • In that period, new firms of which 60 % in textiles were established. In 2004, 45 % of firms in Denizli were in textile sector (Durak, 2005). • In Denizli’s total exports in 2007, 61.2 % comes from textiles and confection industry, while in Turkey’s total textile exports Denizli’s share is 5.9 % (Dünya, 2008) • In Denizli textile sector, there are two different types of organizational forms and network relations. The first one is the production chain with low technological structure which produces low quality products for low and middle income group. The producers in this group are small and medium size enterprises dependent on family labor and 90 % of these produce by subcontracting.

12. The second group is export-oriented and specialized in towel and bathrobe, further trying product differentiation in these two products. This group is comprised of firms with relatively larger scales, which also observe increases in subcontracting relations (Gözlükaya, 2005). • After 1990s, especially in 1995, the number of small sized enterprises (with 0-9, 10-24 and 25-49 workers) in Denizli increased by 35 %. This can be attributed to the rise in the profitability of textile sector in Turkey and the optimistic expectations after the Customs Union with the EU. • In addition, after 1995, there is a trend towards vertical integration and the inclusion of all stages of production into the firm, in order to assess the quality better and make use of investment initiatives (Gözlükaya, 2005). • Due to several factors such as globalization and increased competition in the world, textile sector entrepreneurs are facing problems such as contraction of market conditions and competition with high capital firms.

13. At this point, regional development policies and policy initiatives should come into the stage to facilitate learning, knowledge sharing and to implement region-sensitive innovation and development policies. • Unfortunately, there seems to be no direct policy initiative for Denizli textile and clothing industry. The only regional development plan pioneered by the government was between the years 1963-69. • EGEV (Aegean Foundation for Economic Development) was founded in 1992 by the provincial and municipal administrations, universities and business chambers and associations of İzmir to promote İzmir for foreign investments. • EGEV invited the institutions and organizations of the nine other provinces of the Aegean Region, Afyon, Aydın, Balıkesir, Çanakkale, Denizli, Kütahya, Manisa, Muğla, and Uşak to join the foundation, which they accepted. Since 1997, EGEV comprises 118 institutional members.

14. The function of EGEV is defined as balanced and sustainable development of the Aegean Region through the efficient utilization of human and natural resources. • The following institutions in Denizli are members of EGEV : Governorship of Denizli, Denizli Metropolitan Municipality, Denizli Chamber of Commerce, Denizli Chamber of Industry, Denizli Commodity Exchange, Denizli Chamber of Agriculture, Denizli Chamber of SME's and Artisans, Denizli Pamukkale University, Denizli Journalist’s Association, DESİAD Association, DEGİAD Association, Denizli Jaycees Association (EGEV, 2008). • Aegean Region Development Project (1999-2002) project, initiated by İzmir Chamber of Commerce, in order to form regional development agencies in İzmir and in the other Aegean Region provinces, is also another policy initiative framework for Denizli.

15. 3. Survey Questionnaire Results • The data for the analysis is gathered through desktop research and secondary data. In-depth interviews are conducted via a structured survey questionnaire to SMEs in towel and bathrobe clusters to explore network relations and innovativeness. • Survey questionnaire is prepared by the ESF project (named “Constructing Regional Advantage: Towards State of the Art Regional innovation System Policies in Europe”) leader group in University of Lund (CIRCLE) and project partners in University of Utrecht. • The questionnaire consists of four parts: introduction, knowledge exchange (market knowledge and technological knowledge), innovation performance and policy initiatives. All together, it is composed of twenty-seven questions. The questionnaire is applied to thirty-two firms in Denizli, all in towel, bathrobe and home textile sector.

16. Part 1: General Information Figure 1: Function of the Respondent

17. Part 1: General Information Figure 2: Owned by other organization

18. Part 1: General Information Figure 3: Number of Employees

19. Part 1: General Information Figure 4: Main activities of the firms

20. Part 1: General Information Figure 5: The education level of employees

21. Part 1: General Information Figure 6A: The importance of knowledge

22. Part 1: General Information Figure 6B: The importance of knowledge

23. Part 1: General Information Figure 7: Organizations firms recruit their highly skilled employees

24. Part 2A: Knowledge Exchange Figure 8: Market Knowledge

25. Part 2B: Knowledge Exchange Figure 9: Technological Knowledge

26. Part 3: Innovation Performance Figure 10: Changes in the last three years

27. Part 3: Innovation Performance Figure 11: The turnover of the firm is attributed to

28. Part 3: Innovation Performance Figure 12: Number of patents in the last three years

29. Part 3: Innovation Performance Figure 13: Number of employees (full time equivalents) that are occupied with the development of new products /services/ solutions most of the time

30. Part 3: Innovation Performance Figure 14: Firms with R&D department

31. Part 4: Policy Initiatives Figure 15: Why not firms received support of any initiatives?

32. Part 4: Policy Initiatives Figure 16: What kind of support firms need?

33. 4. CONCLUSION • The analysis shows that the thirty-two SMEs in towel and bathrobe sector obtain their market and technological knowledge from fairs and exhibitions and market surveys. • With only 15 % of the companies with a R&D department, they have little innovation performance, in spite of an outlier with 150 patents. • It is obvious that serious policy initiatives are crucial for these companies as they need support on finance of innovation projects, education and training of employees, information about markets and new technologies and consultancy. • The analysis of the open ended questions in the project questionnaire shows that textile sector in Denizli is in trouble.

34. The major problem is overvalued YTL which makes price competition almost impossible in the international market. Entrepreneurs claim that they can not compete with China in terms of the cost of production. They claim that major competitor is Spain in high quality towel, bathrobe and home textile products. • SMEs also complain about increasing energy prices. Although energy prices are increased all over the world, SMEs argue that they should rather have to increase slowly. • In Denizli, almost one third of the Small and medium size firms are already bankrupted or merged with bigger ones in the sector. Some SMEs are planning to move their manufacturing plants to Egypt. Some of them are planning to shut down on 2010. • There seems to be no policy initiatives to support textile cluster in Denizli. However, neighboring provinces Afyon and Uşak receives incentives to promote manufacturing.

35. Although all necessary actors; government authorities, universities, civil organizations, and present and potential entrepreneurs exist in Denizli, there is lack of sufficient policy initiatives for textile sector. • Joint participation and action by all main stakeholder groups is crucial while conditions favoring incumbents, at the expense of newcomers, and pluralism in business and innovation need to be systematically removed (Napier, et. al., 2004). • For the efficient working of development agencies (such as EGEV), two practical problems should be solved: • First of all, the direction of priorities between local and regional authorities should be clearly determined. • Secondly, harmonization between various strategic plan practices which are displayed by institutions with specific spatial boundaries must be accomplished (Durgun, 2007).

36. Given the present information and prelimanary results of the study, the following policy implications seem to be crucial for the towel and bathrobe producers in Denizli : • Technology upgrading • Brandname creating (e.g. Mavi Jeans) • Future research aims to : • Increasing the number of firms interviewed in Denizli • Downsizing sample size by identifying good performance and bad performance firms • Analyzing the outlier company (Funika) with 150 patents in detail in terms of innovation performance and brandname manufacturing and retailing.

37. Table 1. General Information

38. Table 1. General Information

39. Table 2A. Knowledge Exchange – Market Knowledge

40. Table 2B. Knowledge Exchange – Technological Knowledge

41. Table 3. Innovation Performance

42. Table 4. Policy Initiatives