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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.
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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
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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)
SLIDE 4 4 10000 20000 30000 40000 50000 60000 70000 80000 90000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Number of employees 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
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The firm typology Vertically integrated Outsourcing 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.
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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
it i t it it it it it
u Ord TDc Dc T logY ε γ β β β β β + + + + + + + =
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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 γt
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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) 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 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
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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 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) td=0 time EBITDA, VA
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Residuals of regression of logVA (left) and logEBITDA (right) over controls
0.05 0.1
1 2 3 4
0.1 0.2 0.3 0.4
1 2 3 4
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
0.02 0.04 0.06
1 2 3 4
0.05 0.1 0.15 0.2 0.25
1 2 3 4
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The Estimates logVA logEBITDA 1 2 3 4 Average impact Dc 0.1656*** (3.98) 0.3534** (2.47) Growth impact TDc 0.0053 (0.68)
(-0.36) Average impact through quota QDc 0.2464*** (3.79) 0.5629** (2.52) Growth impact through quota QTDc 0.0054 (0.49) 0.0179 (0.48) Sector orders Ord 0.0078*** (3.78) 0.0075*** (3.63) 0.0156** (2.20) 0.0143** (2.00) Average trend T 0.0346*** (4.25) 0.0387*** (5.17)
(-0.33)
(-0.37) Year dummies γ Yes Yes Yes Yes Firm’s specific effects u 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
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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
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Net/Gross Effects of Delocalization and Fragmentation logVA logEBITDA 1 2 3 4 Average impact and fragmentation FraDc 0.3096*** (4.29)
(-0.04) Growth impact and fragmentation FraTDc 0.0086 (0.83) 0.0569 (1.59) Average impact net of fragmentation NfraDc 0.1324*** (2.98) 0.4733*** (3.08) Growth impact net of fragmentation NfraTDc 0.0003 (0.03)
(-1.55) Average impact and fragmentation through quotas QFraDc 0.4188*** (3.62)
(-0.03) Growth impact and fragmentation through quotas QFraTDc 0.0144 (0.90) 0.1244** (2.26) Average impact net of fragmentation through quotas QNfraDc 0.1751** (2.39) 0.7035*** (2.79) Growth impact net of fragmentation through quotas QNfraTDc 0.0163 (1.31) 0.0322 (0.75) Sector orders Ord 0.0078*** (3.82) 0.0067*** (3.23) 0.0163** (2.31) 0.0139* (1.95) Average trend T 0.0348*** (4.31) 0.0387*** (5.20)
(-0.27)
(-0.61) Year dummies γ Yes Yes Yes Yes Firm’s specific effects u Yes Yes Yes Yes R – Squared within 0.5504 0.5470 0.1040 0.1025
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Conclusions This work considers both subcontracting relations and direct investments abroad The per capita value added and the EBITDA positively feel the impact of relocation abroad. The delocalization strategy seems to offer an important contribution in order to increase the firm profitability, at the same time international relocation increases the per capita value added of people remaining in the domestic firms. This means that in the domestic firm higher skilled jobs are preserved. However delocalization does not seem to have any direct effect on the rate of growth of productivity, and therefore we shouldn’t expect lasting effects when all the firms are delocalized. Working in a more and more complex international context encourages the final producers to improve managerial and organisational efficiency and increases the demand for skilled high value added services. Nonetheless the choice to delocalize has an immediate strong negative impact on employment and on the connected skills, particularly in a region where the number of people employed in manufacturing is high, as in the Veneto clothing and footwear sectors. An area which has always been characterized by the presence of small businesses clustered in industrial districts, where the destiny of the firm has often been considered in symbiosis with that of the workers, is now making his way along a different trend. Profit realization is now farther and farther away from places where firms that lead the productive chains are located. Therefore a profit increase by the final producers no longer directly reflects positive corresponding variations in local employment and in local revenues.
