Quantifying the productivity counterpart of outsourcing in the Italian manufacturing industries

Quantifying the Quantifying the productivity counterpart productivity counterpart

of outsourcing in the of outsourcing in the Italian manufacturing Italian manufacturing

industriesindustries

F. Daveri - M. Iommi - C. Jona-LasinioF. Daveri - M. Iommi - C. Jona-Lasinio

OECD Productivity WorkshopOECD Productivity WorkshopBern, 16-18 October, 2006Bern, 16-18 October, 2006

Bern – October 18, 2006

MotivationMotivation Growing importance of international “outsourcing” of Growing importance of international “outsourcing” of

services in Western economies.services in Western economies. Evidence that both offshoring of services and of Evidence that both offshoring of services and of

material inputs are associated with productivity gainsmaterial inputs are associated with productivity gains Amiti and Wei, 2006; Girma and Gorg, 2004; Criscuolo and Leaver, Amiti and Wei, 2006; Girma and Gorg, 2004; Criscuolo and Leaver,

20052005.. Outsourcing as such, irrespective of where to, should be associated to Outsourcing as such, irrespective of where to, should be associated to

productivity growthproductivity growth

Italy was largely missing from previous research on Italy was largely missing from previous research on this topic.this topic.

Availability of new symmetric I-O tables.Availability of new symmetric I-O tables.


Our aimsOur aims Quantify the extent of domestic and international Quantify the extent of domestic and international

outsourcing in the Italian manufacturing sector.outsourcing in the Italian manufacturing sector.

Provide a comparison between Provide a comparison between directdirect and and indirectindirect measures of outsourcing. measures of outsourcing.

Evaluate the productivity counterpart of Evaluate the productivity counterpart of outsourcing. outsourcing.


DataData Symmetric input-output tables (industry by industry Symmetric input-output tables (industry by industry

matrix) matrix) At the 60-sector level (according to the NACE Rev1.1 At the 60-sector level (according to the NACE Rev1.1

classification) classification) Time period: 1995-2003Time period: 1995-2003 Focus on domestic and international outsourcing of Focus on domestic and international outsourcing of

manufacturing intermediates and services for 14 manufacturing intermediates and services for 14 manufacturing industriesmanufacturing industries

Our – broad - definition of “market service providers”:Our – broad - definition of “market service providers”: transports, storage and communicationstransports, storage and communications finance and insurancefinance and insurance real estate and other business servicesreal estate and other business services


LP in manufacturing: LP in manufacturing: abrupt but scattered slowdown (ND abrupt but scattered slowdown (ND first, then D)first, then D)

1970-1970-8080

1980-1980-9595

1995-1995-0303

1995-1995-0000

2000-2000-0303

ManufacturiManufacturingng

2.82.8 3.03.0 0.20.2 1.01.0 -1.0-1.0

Non-Non-durablesdurables

2.72.7 3.13.1 0.30.3 0.70.7 -0.2-0.2

DurablesDurables 2.92.9 2.72.7 0.00.0 1.71.7 -2.7-2.7


TFP in manufacturing: same TFP in manufacturing: same pattern as LPpattern as LP

1970-1970-8080

1980-1980-9595

1995-1995-0303

1995-1995-0000

2000-2000-0303

ManufacturiManufacturingng

-- 1.61.6 -0.5-0.5 0.30.3 -1.7-1.7

Non-Non-durablesdurables

-- 1.81.8 -0.5-0.5 -0.2-0.2 -1.0-1.0

DurablesDurables -- 1.21.2 -0.5-0.5 1.31.3 -3.4-3.4


Measures of international and Measures of international and domestic outsourcingdomestic outsourcing

OSMOSMiiDD= = j j [DOMESTIC INPUT PURCHASES OF MATERIAL j by IND. [DOMESTIC INPUT PURCHASES OF MATERIAL j by IND.

i /i / TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i] TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]

OSSOSSiiDD= = j j [DOMESTIC PURCHASES OF SERVICE INPUT j by INDST. [DOMESTIC PURCHASES OF SERVICE INPUT j by INDST.

i /i / TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i] TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]

OSMOSMiiFF= = j j [IMPORT OF MATERIAL j by INDST. i /[IMPORT OF MATERIAL j by INDST. i /

TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]

OSSOSSiiFF= = j j [IMPORT OF SERVICE INPUT j by INDST. i /[IMPORT OF SERVICE INPUT j by INDST. i / TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i] TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]


Table 1: Domestic outsourcing of intermediate products in Italy’s manufacturing industries

% points1995 1999 2003 (1995-

99)(1999-

03)(1995-

03)Food products and

tobacco 26.8 26.1 25.6 -0.7 -0.5 -1.1

Textiles and clothing 53.1 49.0 43.8 -4.2 -5.2 -9.3

Leather and footwear 54.3 52.4 49.5 -1.9 -2.9 -4.8Wood and wood

products 52.9 52.8 50.6 -0.1 -2.2 -2.3Paper, printing and

publishing 37.5 36.3 33.9 -1.2 -2.4 -3.5Coke and refined

petroleum products 22.2 21.7 14.7 -0.5 -6.9 -7.5Chemicals and

chemical products 32.9 33.2 24.5 0.2 -8.7 -8.5Rubber and plastic

products 39.8 39.9 36.0 0.2 -3.9 -3.8Other non-metallic mineral products 39.2 37.1 37.4 -2.1 0.3 -1.8Basic metals and fabricated metal

products 45.7 44.3 43.3 -1.4 -1.0 -2.4Machinery and

equipment n.e.c. 55.7 53.3 51.5 -2.4 -1.7 -4.2Electrical and

optical equipment 32.9 31.3 29.0 -1.6 -2.3 -3.9

Transport equipment 47.6 43.8 40.9 -3.8 -2.9 -6.7Other mnfg. industries 45.5 47.2 44.7 1.7 -2.5 -0.8Average

manufacturing industry 41.9 40.6 37.5 -1.3 -3.1 -4.3-4.3

Source: own calculation from ISTAT – National Accounts

Domestic outsourcing of intermediates (OSMDomestic outsourcing of intermediates (OSMDD): ): down in 1995-03down in 1995-03


Table 2: International outsourcing of intermediates in Italy’s manufacturing industries

1995 1999 2003 (1995-99) (1999-03) (1995-03)Food products and tobacco 8.5 8.5 9.3 0.0 0.8 0.8

Textiles and clothing 17.3 17.7 20.9 0.4 3.2 3.6

Leather and footwear 16.2 16.2 20.4 0.0 4.1 4.1

Wood and wood products 15.0 13.9 14.7 -1.1 0.8 -0.3

Paper, printing and publishing 21.5 18.2 18.0 -3.4 -0.1 -3.5

Coke and refined petroleum products 29.5 16.1 32.5 -13.5 16.4 2.9

Chemicals and chemical products 40.9 38.3 44.5 -2.5 6.1 3.6

Rubber and plastic products 29.9 27.3 29.1 -2.7 1.8 -0.8

Other non-metallic mineral products 11.9 10.6 10.0 -1.3 -0.6 -1.9

Basic metals and fabricated metal products 23.6 21.2 20.9 -2.4 -0.3 -2.7

Machinery and equipment n.e.c. 14.1 14.4 15.0 0.3 0.6 0.9

Electrical and optical equipment 32.3 30.5 31.0 -1.8 0.5 -1.4

Transport equipment 24.5 26.9 29.3 2.4 2.4 4.8

Other mnfg. industries 22.2 18.5 21.1 -3.7 2.6 -1.1

Average manufacturing industry 22.0 19.9 22.6 -2.1 +2.7 0.7

Source: own calculation from ISTAT - National Accounts

Int’n’l outsourcing of intermediates (OSMInt’n’l outsourcing of intermediates (OSMFF): ): up in 1995-03up in 1995-03


Table 3: Domestic outsourcing of market services in Italy’s manufacturing industries



Leather and footwear 12.4 13.6 13.2 1.1 -0.4 0.8

Wood and wood products 14.6 15.8 18.0 1.2 2.2 3.4

Paper, printing and publishing 17.8 20.1 21.9 2.3 1.9 4.1

Coke and refined petroleum products 18.4 30.1 26.3 11.7 -3.8 7.9

Chemicals and chemical products 10.9 12.4 14.3 1.5 1.9 3.4

Rubber and plastic products 13.9 15.9 18.2 2.0 2.3 4.3

Other non-metallic mineral products 20.4 21.8 23.0 1.3 1.2 2.6

Basic metals and fabricated metal products 14.7 18.0 19.0 3.4 0.9 4.3


Electrical and optical equipment 12.5 14.3 14.7 1.8 0.4 2.2

Transport equipment 12.3 13.4 13.5 1.1 0.1 1.2

Other mnfg. industries 14.4 15.8 16.4 1.3 0.6 2.0

Average manufacturing industry 14.1 16.6 17.5 +2.5 +0.9 +3.4


Domestic outsourcing of services (OSSDomestic outsourcing of services (OSSDD): up ): up in 1995-03in 1995-03


Table 4: International outsourcing of market services in Italy’s manufacturing industries



Leather and footwear 1.1 1.3 1.3 0.2 0.1 0.2

Wood and wood products 1.5 1.5 1.7 0.0 0.2 0.2

Paper, printing and publishing 1.5 1.5 1.6 0.0 0.1 0.1

Coke and refined petroleum products 3.4 5.8 5.6 2.4 -0.2 2.2

Chemicals and chemical products 1.8 1.8 2.0 0.0 0.2 0.3

Rubber and plastic products 1.1 1.1 1.2 0.0 0.1 0.1

Other non-metallic mineral products 0.7 0.7 0.7 0.0 0.0 -0.1

Basic metals and fabricated metal products 0.6 0.7 0.7 0.1 0.0 0.1


Electrical and optical equipment 3.7 4.8 5.3 1.1 0.5 1.6

Transport equipment 1.5 1.8 1.6 0.3 -0.2 0.1

Other mnfg. industries 1.5 1.6 1.8 0.1 0.2 0.3

Average manufacturing industry 1.5 1.8 1.9 +0.3 +0.1 +0.4


Int’n’l outsourcing of services (OSSInt’n’l outsourcing of services (OSSFF): mildly ): mildly up in 1995-03up in 1995-03


DIJ vs FH measuresDIJ vs FH measures FH measure imputes average propensity to import FH measure imputes average propensity to import

for the economy to each industry – unwarranted for the economy to each industry – unwarranted assumption justifed by data limitationsassumption justifed by data limitations

We have the right data to directly compute offshoring We have the right data to directly compute offshoring FH and DIJ measures are highly correlated: FH and DIJ measures are highly correlated:

Across industries Across industries is 0.8 on average 1995-03 (but falls is 0.8 on average 1995-03 (but falls to .6 in to .6 in 1999-03)1999-03)

FH shares systematically lower than DIJ sharesFH shares systematically lower than DIJ shares Feenstra-Hanson measures systematically “optimistic” in Feenstra-Hanson measures systematically “optimistic” in

evaluating extent of offshoringevaluating extent of offshoring Use of indirect outsourcing measures may bias estimatesUse of indirect outsourcing measures may bias estimates


Empirical specificationEmpirical specification itit

ffsit

ffmit

ddsit

ddmtiitit eOSSOSMOSSOSMbTaIGROWTHKLGROWTHLP

where:

GROWTHLPit is the growth rate of value added per full-time equivalent employed worker in industry i (with i=1,..14) at time t (with t=1995,..,2003);

GROWTHKLit is the growth rate of the industry capital labor ratios;

OSS is the outsourcing of services;

OSM is the outsourcing of intermediates

“d” and “f” mean “domestic” and “foreign”


Empirical resultsEmpirical resultsTable 5: Outsourcing and productivity growth in the Italian manufacturing industries

Dependent variable: yearly growth rate of value added per full-time equivalent employed (14 industries, 1995-03)

WLS OLS WLS OLS WLS OLS WLS OLS WLS OLS WLS WLS

Our Osm, Oss Our Osm, Oss FeenstraHanson

Osm

Feenstra Hanson

Osm

LaggedOsm, Oss

LaggedOsm, Oss

LaggedFeenstraHanson

Lagged FeenstraHanson

Our Osm, Oss

Our Osm, Oss

Feenstra-Hanson

Lagged Osm, Oss

Growth of capital - labor ratio

.39***

(.11).45***

(.13).36***

(.12).45***

(.15).31**

(.13).44**

(.17).36**

(.17).38**

(.17).43***

(.13).65***

(.16).41***

(.13).30**(.14)

(OSM foreign) -.18***

(.05)-.27***

(.04)-.25***

(.10)-.40***

(.08).10**

(.05).11**

(.05)-.19**

(.10)-.16(.10)

(OSS foreign) .03(.03)

-.03(.04)

.25**

(.11).39***

(.11)-.02(.04)

-.02(.05)

.11**

(.04).09**

(.04)

(OSM domestic) .09(.07)

.00(.06)

.27***

(.07).23***

(.06)-.08(.09)

-.04(.08)

-.12(.09)

-.11(.08)

(OSS domestic) -.32***

(.10)-.56***

(.11)-.54***

(.18)-.89***

(.18).06

(.13).02

(.14)-.14(.16)

-.15(.18)

Interaction terms

R&D*OSMint’n’l .06(.08)

.02(.10)

.01(.09)

.02(.09)

R&D*OSSint’n’l .00(.02)

-.00(.02)

.02(.11)

-.01(.02)

R&D*OSMdom .20**

(.10).20

(.14)16**

(.07)-.08(.11)

R&D*OSSdom -.00(.09)

-.02(.12)

-.04(.12)

.09(.10)

Adjusted R-Squared

.51 .58 .47 .51 .32 .27 .30 .29 .34 .50 .33 .26

RMSE .027 .034 .028 .036 .032 .041 .041 .042 .031 .037 .031 .316

# observations 112 112 112 112 98 98 98 98 112 112 112 98


Conclusions and future Conclusions and future researchresearch Not all manufacturing industries outsource Not all manufacturing industries outsource

production to the same extent either inside or production to the same extent either inside or outside the country;outside the country;

Off-shore outsourcing took off in 1999-2003, not Off-shore outsourcing took off in 1999-2003, not before; before;

Only the international outsourcing of Only the international outsourcing of intermediates is positively related to productivity intermediates is positively related to productivity growth, while the other forms of outsourcing are growth, while the other forms of outsourcing are not robustly related to productivity growthnot robustly related to productivity growth


Conclusions and future Conclusions and future researchresearch DirectDirect and and indirectindirect measures of measures of

outsourcing provide different empirical outsourcing provide different empirical resultsresults

The results obtained from our indicator of outsourcing The results obtained from our indicator of outsourcing are quite different from those arising from the are quite different from those arising from the commonly used Feenstra-Hanson measures of commonly used Feenstra-Hanson measures of outsourcingoutsourcing


Conclusions and future Conclusions and future researchresearch Disaggregate market services further

Potential to do so: I-O Table available with up to 101 industries

Improve econometric techniques to more satisfactorily deal with endogeneity issues

Backup SlidesBackup Slides

Absolute differences DIJ-FH1995 0.027 0.052 0.039 0.036 0.125 0.202 0.134 0.183 0.063 0.076 -0.048 0.077 -0.058 0.1581996 0.029 0.049 0.031 0.037 0.111 0.243 0.126 0.174 0.058 0.074 -0.049 0.068 -0.065 0.1291997 0.030 0.060 0.027 0.038 0.118 0.237 0.122 0.179 0.061 0.075 -0.045 0.064 -0.065 0.1341998 0.029 0.056 0.031 0.035 0.119 0.100 0.122 0.166 0.059 0.076 -0.047 0.060 -0.075 0.1381999 0.031 0.053 0.030 0.031 0.115 0.103 0.115 0.160 0.057 0.074 -0.044 0.060 -0.068 0.1162000 0.031 0.065 0.030 0.034 0.124 0.265 0.127 0.189 0.065 0.076 -0.045 0.075 -0.077 0.1292001 0.033 0.068 0.038 0.035 0.119 0.281 0.132 0.201 0.063 0.085 -0.047 0.062 -0.058 0.1412002 0.035 0.069 0.037 0.039 0.125 0.287 0.123 0.175 0.057 0.075 -0.044 0.058 -0.086 0.1332003 0.035 0.070 0.035 0.034 0.119 0.241 0.135 0.166 0.058 0.070 -0.038 0.066 -0.089 0.130

d(1995-99) 0.004 0.001 -0.009 -0.005 -0.011 -0.099 -0.019 -0.024 -0.006 -0.002 0.004 -0.017 -0.010 -0.042d(1999-03) 0.004 0.017 0.005 0.003 0.004 0.139 0.021 0.007 0.001 -0.005 0.006 0.006 -0.021 0.014d(1995-03) 0.008 0.018 -0.004 -0.002 -0.007 0.039 0.002 -0.017 -0.005 -0.007 0.010 -0.011 -0.031 -0.028

alim tessabbcuoio legno carta coke chem gom plamin nmetmetal mecc ele mez tra oth man

CorrelationAcross industries

1995 0.591996 0.531997 0.531998 0.701999 0.742000 0.592001 0.592002 0.562003 0.64

d(1995-99) 0.76d(1999-03) 0.55d(1995-03) 0.79Over time alim tessabbcuoio legno carta coke chem gom plamin nmetmetal mecc ele mez tra oth man

0.88 0.99 0.99 0.90 0.95 0.93 0.97 0.70 0.93 0.96 0.93 0.95 0.96 0.42

FH vs DIJ: OSM

FH vs DIJ: OSSAbsolute differences DIJ-FH

1995 -0.011 -0.011 -0.013 -0.012 -0.014 -0.005 -0.030 -0.014 -0.016 -0.029 -0.029 -0.024 -0.043 0.0001996 -0.011 -0.012 -0.014 -0.011 -0.010 -0.010 -0.032 -0.015 -0.015 -0.029 -0.032 -0.022 -0.047 -0.0011997 -0.011 -0.015 -0.013 -0.013 -0.011 -0.008 -0.033 -0.015 -0.016 -0.031 -0.032 -0.024 -0.048 -0.0031998 -0.010 -0.013 -0.013 -0.013 -0.010 0.011 -0.032 -0.015 -0.016 -0.032 -0.032 -0.022 -0.052 -0.0011999 -0.012 -0.015 -0.016 -0.013 -0.011 0.003 -0.036 -0.018 -0.016 -0.033 -0.035 -0.027 -0.055 -0.0032000 -0.012 -0.018 -0.021 -0.014 -0.014 -0.011 -0.042 -0.020 -0.017 -0.039 -0.038 -0.035 -0.060 -0.0042001 -0.013 -0.021 -0.021 -0.011 -0.010 0.000 -0.050 -0.021 -0.016 -0.037 -0.038 -0.030 -0.057 -0.0032002 -0.015 -0.020 -0.021 -0.014 -0.012 0.004 -0.054 -0.020 -0.014 -0.035 -0.039 -0.029 -0.068 -0.0032003 -0.016 -0.022 -0.022 -0.017 -0.012 0.000 -0.053 -0.025 -0.014 -0.036 -0.038 -0.028 -0.066 -0.005

d(1995-99) -0.001 -0.005 -0.003 -0.001 0.003 0.008 -0.006 -0.003 0.000 -0.003 -0.006 -0.003 -0.012 -0.002d(1999-03) -0.004 -0.007 -0.006 -0.004 0.000 -0.003 -0.018 -0.008 0.002 -0.003 -0.002 -0.001 -0.012 -0.002d(1995-03) -0.005 -0.011 -0.009 -0.005 0.003 0.005 -0.024 -0.011 0.002 -0.006 -0.009 -0.004 -0.023 -0.004

alim tessabbcuoio legno carta coke chem gom plamin nmetmetal mecc ele mez tra oth man

CorrelationAcross industries

1995 0.621996 0.651997 0.631998 0.561999 0.632000 0.632001 0.622002 0.512003 0.55

d(1995-99) 0.73d(1999-03) 0.24d(1995-03) 0.39Over time alim tessabbcuoio legno carta coke chem gom plamin nmetmetal mecc ele mez tra oth man

0.90 0.95 0.87 0.77 0.00 0.78 0.68 0.71 0.58 0.79 0.79 0.92 0.44 0.86

FH measure of service outsourcing

SYMMETRIC I-O TABLES

Domestic intermediatesImported intermediatesTotal intermediates

SYMMETRIC I-O TABLEScosti di produzione interna sostenuti dalla branca agricoltura per acquistare prodotti agricoli necessari per la sua produzione di prodotti agricoli, prodotti industriali e servizi

costi di produzione interna sostenuti dalla branca agricoltura per acquistare prodotti industriali necessari per la sua produzione di prodotti agricoli, prodotti industriali e servizi

Domestic use

SYMMETRIC I-O TABLES

I.P.I. I.I.C.

Imported use

Supply

Quantifying the productivity counterpart of outsourcing in the Italian manufacturing industries

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