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Latest research: firms see benefits to bottom line from Better Work

3 Sep 2018

A new working paper supports the business case for engaging with Better Work

Ho Chi Minh City – The four garment factories of the Thuan Phuong Group are riding a wave.  “Our production areas are being enlarged, and we’ve invested in new machines and equipment order to meet production demand,” says Nguyen Thi Thanh Loan, compliance director for the group.  Her firm has also been on a hiring spree.

The Thuan Phuong factories, like many in Vietnam, are enjoying strong growth as the country is becoming entrenched as a major sourcing destination for garment production. Nguyen believes the association with Better Work has given them an edge in helping build relationships with many big name garment buyers. “Because of the trust (in Better Work’s assessments), buyers agree to sign up with our company for many regular and big orders,” she says.

It’s likely that these larger orders, the improved stability of orders and the premium that Better Work factories can attract from buyers contributes to greater profitability of the firms, according to  an updated and extended analysis in a new addition to the Better Work Discussion Paper series.  The working paper, The Impact of Better Work: Firm Performance in Vietnam, Indonesia and Jordan, found significant correlation between profitability and the length of a factory’s relationship with Better Work.

Better Work, a collaboration of the International Labour Organization and the International Finance Corporation, a member of the World Bank Group, advises garment factories on compliance with international labour standards and national labour law, such as paying the minimum wage.  The research found that implementing such changes generally increases labour costs for firms.  However, it also found that those costs were largely offset by increases in productivity.

A key finding of the analysis was that, controlling for other factors, Better Work intervention also leads to greater returns for business.  In Indonesia, by the fourth year of participation in Better Work, quarterly profits have more than doubled from a baseline measure for the average firm. Profitability impacts are even more marked in Vietnam, where a doubling of profit levels is estimated each year from years two through five of participation.

Drusilla Brown, economics professor at Tufts University and co-author of the working paper, says the results are encouraging.  “Establishing the exact impact of interventions like Better Work on profits is always complex, but the data appear to show that factories in the programme have been in a better position to take advantage of expanding markets.”

Profitability effects were less clear cut in Jordan. The researchers found that factory profits initially declined during early engagement with the programme, but that they recovered after a period of adjustment.  Researchers observed that average profit levels for firms in Jordan’s garment industry have been increasing over time, which may be due to the country’s improved reputation as a sourcing destination. Better Work likely contributed to this improved reputation. The programme was instrumental in many changes in the national policy environment, including contributing to conditions to have Jordan’s garment sector removed from the US Department of Labour’s forced labour listing.

For the current analysis, researchers collected data through confidential surveys among workers and managers in 29 Better Work participating factories in Jordan and 53 in Vietnam between 2010 and 2015. In Indonesia, data collection was conducted during the period 2011 to 2017, for 58 factories.

According to Brown, further study on the productivity and profitability of Better Work firms is underway in Cambodia: “Hopefully, this ongoing work will strengthen the direction of the causal relationship between participation in Better Work and firm performance.”

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