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Gianelle Tattara

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Information about Gianelle Tattara

Published on October 10, 2008

Author: FNian

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The value of international outsourcing: a study on Veneto clothing industry Carlo Gianelle, University of Siena, Doctoral School Giuseppe Tattara, University of Venice, Dept. of Economics October 2007

Globalization: real and financial integration Outsourcing abroad of production has become a focal policy followed by firms in order to face competition on international markets To ‘measure’ the degree of internationalization of a firm is not easy: 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 create a dense network of links and subcontracting relations with overseas companies: Gradual elimination of trade barriers New countries: East Europe, China and India New technology and phase economies (fragmentation of cycles) Low transport costs

Outsourcing abroad of production has become a focal policy followed

by firms in order to face competition on international markets

To ‘measure’ the degree of internationalization of a firm is not easy:

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 create a dense network of links

and subcontracting relations with overseas companies:

Gradual elimination of trade barriers

New countries: East Europe, China and India

New technology and phase economies (fragmentation of cycles)

Low transport costs

Italy: apparel and footwear Italy: In the 80s many production phases have been 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 sophisticated machinery (cutting, washing, dyeing and printing -> apparel, moulded soles -> footwear) Veneto: The number of employees working in SMEs textile-clothing-footwear in Veneto sharply increased in the 70s and declined subsequently in the 90s because a vast majority of subcontractors are foreign (foreign outsourcing -> Benetton is an earlier example: from 80% domestic to 20% domestic in 5 years)

Italy:

In the 80s many production phases have been 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 sophisticated machinery (cutting,

washing, dyeing and printing -> apparel, moulded soles -> footwear)

Veneto:

The number of employees working in SMEs textile-clothing-footwear

in Veneto sharply increased in the 70s and declined subsequently in

the 90s because a vast majority of subcontractors are foreign

(foreign outsourcing -> Benetton is an earlier example: from 80%

domestic to 20% domestic in 5 years)

Veneto: apparel and footwear 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Number of employees Artisan firms Big firms not-artisan TOT

Empirical strategy We consider outsourcing abroad as a new policy adopted by the final firms and try to evaluate its effect at the firm level Does the decision of outsourcing abroad lead to: Expansion of the activity in terms of Turnover? N ecessary to defend or increase the market share Realization of more profits in terms of Gross earnings (Ebitda)? ‘ Lean and mean’ : anecdotal evidence -> final firms (brands) slice the production process iff they are able to embed a larger share of profits

We consider outsourcing abroad as a new policy adopted by the final

firms and try to evaluate its effect at the firm level

Does the decision of outsourcing abroad lead to:

Expansion of the activity in terms of Turnover?

N ecessary to defend or increase the market share

Realization of more profits in terms of Gross earnings (Ebitda)?

‘ Lean and mean’ : anecdotal evidence -> final firms (brands) slice the production process iff they are able to embed

a larger share of profits

The effects of outsourcing Did delocalization increase Turnover and Gross profits? Is the effect higher, the higher the quota of products realized abroad? Was this a lasting improvement or a once for all bonus? Fixed-effect impact equation using panel data referring to final producers logY is alternately the Turnover and the Gross earning (EBITDA) both expressed in logarithms Impact of outsourcing is estimated by means of the dummy Dc that splits the time series in 2 periods: before and after the relocation event Linear trend T also included. Dummy Dc interacts with T , resulting in the variable TDc that captures the growth effect of relocation Controls: sector orders at the international level Ord ; year dummies γ t

Did delocalization increase Turnover and Gross profits?

Is the effect higher, the higher the quota of products realized abroad?

Was this a lasting improvement or a once for all bonus?

Fixed-effect impact equation using panel data referring to final producers

logY is alternately the Turnover and the Gross earning (EBITDA)

both expressed in logarithms

Impact of outsourcing is estimated by means of the dummy Dc that splits the time series in 2 periods: before and after the relocation event

Linear trend T also included. Dummy Dc interacts with T , resulting in the variable TDc that captures the growth effect of relocation

Controls: sector orders at the international level Ord ; year dummies γ t

The dataset Self-selected group of 70 limited and joint stock companies based in Veneto (1/4 of the total employment of companies with more than 50 employees ), final producers in the clothing and footwear sector, which have delocalized some important production phases Mostly medium-size firms , with average workforce of 110, average turnover of 36 millions of Euros 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: 1982 – 2003, unbalanced panel; 16 obs. per firm on average Countries of delocalization: Romania , China , Tunisia , Hungary, Bulgaria, Croatia, Turkey, Slovakia, India, Indonesia, etc.

Self-selected group of 70 limited and joint stock companies based in Veneto (1/4 of the total employment of companies with more than 50 employees ), final producers in the clothing and footwear sector, which have delocalized some important production phases

Mostly medium-size firms , with average workforce of 110, average turnover of 36 millions of Euros

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: 1982 – 2003, unbalanced panel; 16 obs. per firm on average

Countries of delocalization: Romania , China , Tunisia , Hungary, Bulgaria, Croatia, Turkey, Slovakia, India, Indonesia, etc.

Average and growth effect of relocation Average effect : drift of the continuous line Growth effect : difference in the dotted line slope t d =0 time EBITDA, Turnover

Average effect : drift of the continuous line

Growth effect : difference in the dotted line slope

Effects of relocation: visual representation Resid. of regress. of logTurn (left) and logEBITDA (right) over controls In the case of EBITDA there’s a DIP : some firms delocalize after a drop in gross (net) profits -> reasonable result but caution is required in interpreting the coefficient estimates: firms self-select into treatment Problem: the average effect of relocation tend to be overestimated if reported to the entire population

Resid. of regress. of logTurn (left) and logEBITDA (right) over controls

In the case of EBITDA there’s a DIP : some firms delocalize after a

drop in gross (net) profits -> reasonable result but caution is required

in interpreting the coefficient estimates: firms self-select into treatment

Problem: the average effect of relocation tend to be overestimated if

reported to the entire population

The estimates (1) 4 3 2 1 0 .1765** (0.0775) 0.1629*** (0.0447) Average impact 0.2632 0.2644 0.5052 0.5036 R-sq within 1094 1094 1136 1136 n. of observations Yes Yes Yes Yes Firm’s effects Yes Yes Yes Yes Year dummies Yes Yes Yes Yes Time trend 0 .0191*** (0.0039) 0 .0194*** (0.0038) 0.0193*** (0.0024) 0.0190*** (0.0024) Sector orders 0 .0044 (0.0261) -0.0351** (0.0143) Growth imp. quota 0 .2111 (0.1289) 0.3499*** (0.0799) Average imp. quota 0.0007 (0.0164) -0.0272*** (0.0102) Growth impact logEBITDA logTurn

Effects of delocalization and fragmentation The decision to delocalize can imply: moving abroad phases which were once carried out within the firm moving abroad those phases which were delocalized domestically Case (1) : slicing production and allocating abroad superimpose one another and the estimate blurs the effect attributed to outsourcing with the effect of fragmentation. To evaluate the net impact of the offshore alternative we split the sample in treated and untreated firms: treated firms delocalize abroad and at the same time fragment production non treated firms delocalize phases previously outsourced in the domestic market For treated firms the parameter estimate reflects both delocalization abroad and fragmentation

The decision to delocalize can imply:

moving abroad phases which were once carried out within the firm

moving abroad those phases which were delocalized domestically

Case (1) : slicing production and allocating abroad superimpose one

another and the estimate blurs the effect attributed to outsourcing with

the effect of fragmentation. To evaluate the net impact of the offshore

alternative we split the sample in treated and untreated firms:

treated firms delocalize abroad and at the same time fragment production

non treated firms delocalize phases previously outsourced in the domestic market

For treated firms the parameter estimate reflects both delocalization

abroad and fragmentation

The estimates (2) 0 .0753*** (0.0292) -0.0232 (0.0164) Growth imp. quota + fragm. -0.4242** (0.2106) 0.0419 (0.1038) Average imp. quota + fragm. -0.0188 (0.0193) 0 .0250** (0 .0114 ) Growth impact - fragm. 0 .2934*** (0.0872) 0 .2227*** (0 .0514 ) Average impact - fragm. 4 3 2 1 -0.1792 (0.1319) -0.0515 (0 .0639 ) Average impact + fragm. 0.2632 0.2644 0.5096 0.5097 R-sq within -0.0291 (0.0320) -0.0274* (0.0162) Growth imp. quota - fragm. 0 .4750*** (0.1515) 0.4521*** (0.0994) Average imp. quota - fragm. 0 .0417** (0.0179) -0 .0214* (0 .0109 ) Growth impact + fragm. logEBITDA logTurn

Conclusions This work considers both subcontracting and direct investments EBITDA and Turnover positively feel the ‘one-for-all’ impact of relocation abroad For firms that have already fragmented production when going abroad, profits increase more than proportionally to the increase in the level of activity Delocalization has an immediate strong negative impact on blue-collar employment and on the connected skills, particularly in a region where the number of people employed in manufacturing is high, as in Veneto In an area where the destiny of the firm has often been considered in symbiosis with that of the workers, profit realization is now farther and farther away from places where firms that lead the productive chains are located: a profit increase by the final producers only partially reflects positive variations in local employment and revenues.

This work considers both subcontracting and direct investments

EBITDA and Turnover positively feel the ‘one-for-all’ impact of relocation abroad

For firms that have already fragmented production when going abroad, profits increase more than proportionally to the increase in the level of activity

Delocalization has an immediate strong negative impact on blue-collar

employment and on the connected skills, particularly in a region where

the number of people employed in manufacturing is high, as in Veneto

In an area where the destiny of the firm has often been considered in

symbiosis with that of the workers, profit realization is now farther and

farther away from places where firms that lead the productive chains

are located: a profit increase by the final producers only partially

reflects positive variations in local employment and revenues.

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