Manufacturing Abroad while Making Profits at Home. A Study on Veneto Footwear and Clothing Global Value Chains Carlo Gianelle, University of Siena, Doctoral school. Giuseppe Tattara, University of Venice, Dept of economics.
Globalization: a knit context, real and financial integration Outsourcing of some of the productive and trade activities abroad has become the focal point of the policies followed by firms in order to face competition on international markets. The ‘measure’ of the degree of internationalization of a firm is not an easy task: • direct overseas investments • forms of ‘light’ integration: i.e. trade agreements and subcontracting, particularly important in the case of Italian SMEs: involve reduced capital flows and temporary commodity flows In the 90s SMEs in traditional sectors have created a dense network of links and subcontracting with overseas companies. • gradual elimination of trade barriers • new countries: East Europe - China and India • new technology and phase economies (fragmentation of the production cycle) • low transport costs 2
Italy: apparel and footwear: In the 80s many production phases delegated to Italian outworkers (cutting, dyeing, sewing, stitching and pressing – apparel, stitching – footwear). Phases at the beginning or end of the production chain require human capital (creation, modelling etc) and in manufacturing, sophisticated machinery (cutting, washing, dyeing and printing – apparel – production of moulded soles – footwear). The number of employees working in SMEs textile-clothing-footwear in the Veneto sharply increased in the 70s and declined subsequently in the nineties because a vast majority of subcontractors are foreign (foreign outsourcing. Benetton is an earlier example: from 80% domestic to 20% domestic in 5 years) 3
90000 80000 70000 Number of employees 60000 50000 40000 30000 20000 10000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Artisan firms Big firms not-artisan TOTAL Strategy: consider outsourcing abroad as a new policy by the final firms. Evaluate its effect at the firm level. Are these firms because of outsourcing abroad: • producing more wealth? in terms of Value added • producing more profits? in terms of Gross Earnings 4
The firm typology Vertically Outsourcing integrated domestic foreign Final Subcont. Final Subcont. Value added + - + = per capita Gross profits + - + = Lean and mean: anecdotal evidence: final firms (brands) slice the production process iff they are able to embed a larger share of profits and – as a consequence – a larger share of value added. 5
The Effects of Outsourcing • Was delocalization significant? did it increase per capita value added and profits in a meaningful way? • Is the effect higher, the higher the quota of the products produced abroad? • Was this a lasting improvement or a once for all bonus? Econometric Specification We estimate a fixed-effect impact equation using panel data referring to a group of final producers = β + β + β + β + β + γ + + ε logY T Dc TDc Ord u 0 1 2 3 4 it it it it it t i it � The dependent variable logY is alternately the per capita value added and the gross earning before taxation (EBITDA) both expressed in logarithms � The impact of outsourcing abroad can be estimated by means of a dummy Dc which splits the time period referred to each firm into two sub-periods: before and after the event � A linear trend T is also included. The delocalization dummy, which estimates the average effect of relocation, can interact with the trend, resulting in a delocalization variable TDc that captures the growth effect of relocation � Controls: index of sector orders at the international level Ord ; year dummies γ t 6
Further step: Knowing the proportion of goods produced abroad by each firm (survey), we can attribute a different “intensity” to the delocalization process: the quota of goods produced abroad by the firm can be multiplied by the two delocalization variables Dc and TDc respectively obtaining the average and the growth relocation effect through the quotas ( QDc and QTDc ) Some caution is necessary: available data don’t allow to take into account firm’s specific effects, like those deriving from a change in the type of product, neither the evolution of productive organization in relations to other firms in the production sequence; as these elements are possibly correlated with outsourcing, the result can be blurred The Dataset � Self-selected group of 48 joint stock companies based in the Veneto, final producers in the clothing and footwear sector, which have delocalized some important production phases (hope to rise to 70, 1/3 of the population) � Mostly medium-size firms, employing overall 5.700 workers � Budget data from the Veneto Provincial Chamber of Commerce collection; employment data from the VWH database; data on outsourcing from a questionnaire delivered to each firm and supplemented by several telephone interviews � Time span: 1982 – 2003; unbalanced panel 7
A Visual Representation of the Outsourcing Impact The figure shows the average and the growth effects of relocation � Average effect: drift of the continuous line � Growth effect: difference in the dotted line slope EBITDA, VA t d =0 time We can reproduce the figure through our data plotting the residuals obtained from the regression of the two variables logVA and logEBITDA on controls (year dummies, firm dummies, orders) 8
Residuals of regression of logVA (left) and logEBITDA (right) over controls 0.1 0.4 0.3 0.05 0.2 0 -4 -3 -2 -1 0 1 2 3 4 0.1 -0.05 0 -4 -3 -2 -1 0 1 2 3 4 -0.1 -0.1 -0.15 -0.2 � Ashenfelter dip: some firms delocalize after a drop in per capita value added and EBITDA, firms self-select into treatment � Problem of interpretation: the average delocalization result is overestimated if reported to the population � Solution: to run the estimation after dropping a couple of years preceding delocalization (conservative estimate) Residuals of regression of logVA (left) and logEBITDA (right) over controls, excluding two years before relocation 0.06 0.25 0.2 0.04 0.15 0.02 0.1 0.05 0 0 -6 -5 -4 -3 0 1 2 3 4 -6 -5 -4 -3 0 1 2 3 4 -0.02 -0.05 -0.1 -0.04 -0.15 -0.06 -0.2 9
The Estimates logVA logEBITDA 1 2 3 4 Dc Average impact 0.1656*** 0.3534** (3.98) (2.47) TDc Growth impact 0.0053 -0.0095 (0.68) (-0.36) QDc Average impact through quota 0.2464*** 0.5629** (3.79) (2.52) QTDc Growth impact through quota 0.0054 0.0179 (0.49) (0.48) Ord Sector orders 0.0078*** 0.0075*** 0.0156** 0.0143** (3.78) (3.63) (2.20) (2.00) T Average trend 0.0346*** 0.0387*** -0.0092 -0.0095 (4.25) (5.17) (-0.33) (-0.37) γ Year dummies Yes Yes Yes Yes u Firm’s specific effects Yes Yes Yes Yes R – Squared within 0.5427 0.5424 0.0944 0.0954 Notes: 48 firms, 795 observations, period 1982-2003. The t-value is in brackets. ***: significance 1%, **: significance 5%, *: significance 10%. � The conservative estimates obtained after dropping the two years before delocalization confirm the results (slightly reduced) obtained using the whole dataset, except for some coefficients referring to the EBITDA regression, which are not significant � Robust regressions show high significant impact of relocation with respect to per capita value added, little significant impact with respect to EBITDA 10
The Effects of Delocalization and Fragmentation The decision to delocalize can imply: 1) moving abroad those phases which were once carried out within the firm itself 2) moving abroad those phases which were delocalized domestically In the first case slicing production and allocating abroad superimpose one another and the estimate blurs the effect attributed to outsourcing with the effect of fragmentation. Problems arise in particular with respect to the per capita value added: to evaluate the net impact of the offshore alternative we split the sample in two sub-samples, made by treated and untreated firms � treated firms are firms that delocalize abroad and at the same time fragment production � non treated firms are firms that delocalize abroad production phases previously outsourced in the domestic market The firm is defined as treated when � between the year that precedes and the year that follows the decision to outsource abroad, firm’s employment falls considerably (more than 10%) � the turnover remains more or less the same or rises (we require that it doesn’t drop more than 5%) For treated firms the parameter estimate reflects both delocalization abroad and fragmentation. In the group 9 firms accomplish this assumption, the remaining firms are untreated and their estimate reflects only delocalization, as production was fragmented early in time 11
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