The international garment trade was liberalized in 2005 following the termination of the Multifibre Arrangement (MFA) and ever since then, price competition has intensified. Employing a unique firm dataset collected by the authors, this paper examines the changes in the performance of Cambodian garment firms between 2002/03 and 2008/09. During the period concerned, frequent firm turnover led to a growth of the industry's productivity, and the study found that the average total-factor productivity (TFP) of new entrants was substantially higher than that of exiting firms. Furthermore, we observed that, thanks to productivity growth, an improvement in workers' welfare, including a rise in the relative wages of the low-skilled, was taking place. These industrial dynamics differ considerably from those indicated by the 'race to the bottom' argument as applied to labor-intensive industrialization in low-income countries.