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									  Quantifying the productivity
counterpart of outsourcing in the
Italian manufacturing industries

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

             OECD Productivity Workshop
              Bern, 16-18 October, 2006
Motivation
    Growing importance of international “outsourcing” of services
     in Western economies.
    Evidence that both offshoring of services and of material inputs
     are associated with productivity gains
       Amiti and Wei, 2006; Girma and Gorg, 2004; Criscuolo and Leaver, 2005.
       Outsourcing as such, irrespective of where to, should be associated to productivity
        growth

    Italy was largely missing from previous research on this topic.
    Availability of new symmetric I-O tables.


    Bern – October 18, 2006
Our aims
   Quantify the extent of domestic and international
    outsourcing in the Italian manufacturing sector.

   Provide a comparison between direct and indirect
    measures of outsourcing.

   Evaluate the productivity counterpart of outsourcing.



Bern – October 18, 2006
Data
     Symmetric input-output tables (industry by industry matrix)
     At the 60-sector level (according to the NACE Rev1.1
      classification)
     Time period: 1995-2003
     Focus on domestic and international outsourcing of manufacturing
      intermediates and services for 14 manufacturing industries
     Our – broad - definition of “market service providers”:
          transports, storage and communications
          finance and insurance
          real estate and other business services


Bern – October 18, 2006
LP in manufacturing:
abrupt but scattered slowdown (ND first, then D)

                          1970-80 1980-   1995-   1995-   2000-03
                                  95      03      00
Manufacturing               2.8     3.0     0.2     1.0    -1.0


Non-durables                2.7     3.1     0.3     0.7    -0.2


Durables                    2.9     2.7     0.0     1.7    -2.7


Bern – October 18, 2006
TFP in manufacturing: same pattern as LP

                          1970-80 1980-   1995-   1995-   2000-03
                                  95      03      00
Manufacturing                -      1.6    -0.5     0.3     -1.7


Non-durables                 -      1.8    -0.5    -0.2     -1.0


Durables                     -      1.2    -0.5     1.3     -3.4



Bern – October 18, 2006
Measures of international and domestic
outsourcing
    OSMiD= Sj [DOMESTIC INPUT PURCHASES OF MATERIAL j by IND. i /
                          TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]

               D
    OSSi = Sj [DOMESTIC PURCHASES OF SERVICE INPUT j by INDST. i /
                          TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]


    OSMiF= Sj [IMPORT OF MATERIAL j by INDST. i /
                          TOTAL NON-ENERGY INPUTS USED BY INDUSTRY i]


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



Bern – October 18, 2006
Domestic outsourcing of intermediates (OSMD): down in 1995-03
                              Table 1: Domestic outsourcing of intermediate products in Italy’s manufacturing industries

         % points                      1995              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       -4.8
 Wood and wood products                52.9              52.8               50.6               -0.1                -2.2       -2.3
    Paper, printing and
       publishing                      37.5              36.3               33.9               -1.2                -2.4       -3.5
Coke and refined petroleum
        products                       22.2              21.7               14.7               -0.5                -6.9       -7.5
 Chemicals and chemical
       products                        32.9              33.2               24.5                0.2                -8.7       -8.5
    Rubber and plastic
        products                       39.8              39.9               36.0                0.2                -3.9       -3.8
Other non-metallic mineral
        products                       39.2              37.1               37.4               -2.1                0.3        -1.8
Basic metals and fabricated
      metal products                   45.7              44.3               43.3               -1.4                -1.0       -2.4
Machinery and equipment
         n.e.c.                        55.7              53.3               51.5               -2.4                -1.7       -4.2
   Electrical 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       -6.7
  Other mnfg. industries               45.5              47.2               44.7                1.7                -2.5       -0.8
  Average manufacturing
         industry                      41.9              40.6               37.5               -1.3               -3.1        -4.3
  Bern – October 18, 2006
Source: own calculation from ISTAT – National Accounts
                                                                                                       F
Int’n’l outsourcing of intermediates (OSM ): up 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
   Bern – October 18, 2006
Source: own calculation from ISTAT - National Accounts
                                                                                              D
Domestic outsourcing of services (OSS ): up in 1995-03
                                Table 3: Domestic outsourcing of market services in Italy’s manufacturing industries

                                    1995                1999              2003            (1995-99)         (1999-03)   (1995-03)
 Food products and tobacco            9.8               11.8               14.0                2.0                2.3        4.2
    Textiles and clothing            11.2               13.4               15.4                2.2                2.0        4.2
    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
 Machinery and equipment
          n.e.c.                     13.9               15.9               16.8                2.0                0.9        2.8
    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
   Bern – October from 2006
Source: own calculation 18, ISTAT - National Accounts
                                                                                       F
Int’n’l outsourcing of services (OSS ): mildly up in 1995-03
                               Table 4: International outsourcing of market services in Italy’s manufacturing industries

                                     1995               1999                2003            (1995-99)         (1999-03)   (1995-03)
 Food products and tobacco            0.6                 0.7                0.8                0.1                 0.1        0.2
    Textiles and clothing             1.0                 1.2                1.4                0.2                 0.2        0.4
    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
 Machinery and equipment
          n.e.c.                      1.2                 1.2                1.4                0.0                 0.1        0.2
    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
   Bern – October from 2006
Source: own calculation 18, ISTAT - National Accounts
DIJ vs FH measures
 FH measure imputes average propensity to import for the
  economy to each industry – unwarranted assumption justifed
  by data limitations
 We have the right data to directly compute offshoring
 FH and DIJ measures are highly correlated:
     Across industries r is 0.8 on average 1995-03 (but falls to .6 in
        1999-03)
 FH shares systematically lower than DIJ shares
     Feenstra-Hanson measures systematically “optimistic” in evaluating
      extent of offshoring
     Use of indirect outsourcing measures may bias estimates
 Bern – October 18, 2006
Empirical specification
                                                  
GROWTHLP it   GROWTHKL it   aI i  bTt   m  OSM d
                                                d
                                                            
                                                            it          
                                                                   sd  OSS d   
                                                                                  it        
                                                                                         m  OSM
                                                                                            f        f
                                                                                                         
                                                                                                         it          
                                                                                                                sf  OSS f   
                                                                                                                               it    eit



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”
    Bern – October 18, 2006
Empirical results
                                                 Table 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          Feenstra           Feenstra        Lagged        Lagged         Lagged         Lagged            Our Osm,   Our Osm,   Feenstra-   Lagged
                                                           Hanson             Hanson         Osm, Oss      Osm, Oss        Feenstra       Feenstra            Oss        Oss       Hanson      Osm,
                                                            Osm                Osm                                         Hanson         Hanson                                                Oss

Growth of capital -      .39***         .45***              .36***             .45***         .31**          .44**          .36**          .38**             .43***     .65***     .41***     .30**
       labor ratio
                          (.11)          (.13)               (.12)              (.15)         (.13)          (.17)          (.17)          (.17)              (.13)      (.16)      (.13)      (.14)
 (OSM foreign)         -.18***        -.27***              -.25***           -.40***         .10**          .11**         -.19**           -.16
                         (.05)          (.04)                (.10)             (.08)          (.05)          (.05)         (.10)           (.10)
 (OSS foreign)           .03            -.03                .25**             .39***          -.02           -.02          .11**          .09**
                         (.03)          (.04)                (.11)              (.11)         (.04)          (.05)          (.04)          (.04)
(OSM domestic)           .09            .00                .27***             .23***          -.08           -.04           -.12           -.11
                         (.07)          (.06)                (.07)              (.06)         (.09)          (.08)          (.09)          (.08)
(OSS domestic)         -.32***        -.56***              -.54***           -.89***          .06            .02            -.14           -.15
                         (.10)          (.11)                (.18)             (.18)          (.13)          (.14)          (.16)          (.18)
 Interaction terms

 R&D*OSMint’n’l                                                                                                                                               .06        .02        .01        .02
                                                                                                                                                             (.08)      (.10)      (.09)      (.09)
 R&D*OSSint’n’l                                                                                                                                               .00        -.00       .02        -.01
                                                                                                                                                             (.02)      (.02)      (.11)      (.02)
  R&D*OSMdom                                                                                                                                                 .20**       .20       16**        -.08
                                                                                                                                                             (.10)      (.14)      (.07)      (.11)
  R&D*OSSdom                                                                                                                                                  -.00       -.02       -.04       .09
                                                                                                                                                             (.09)      (.12)      (.12)      (.10)
   Adjusted R-            .51            .58                  .47               .51            .32            .27            .30            .29               .34        .50        .33        .26
        Squared

      RMSE               .027           .034                 .028               .036           .032          .041           .041            .042             .031       .037       .031       .316
  # observations
    Bern – October 112 2006
                   18,                   112                 112                112             98            98             98              98               112        112        112        98
Conclusions and future research
 Not all manufacturing industries outsource production
  to the same extent either inside or outside the country;

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

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

 Bern – October 18, 2006
Conclusions and future research

 Direct and indirect measures of outsourcing provide
   different empirical results

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




 Bern – October 18, 2006
Conclusions and future research
 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




 Bern – October 18, 2006
Backup Slides
FH vs DIJ: OSM
    Absolute differences DIJ-FH
           1995    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     0.158
           1996    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     0.129
           1997    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     0.134
           1998    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     0.138
           1999    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     0.116
           2000    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     0.129
           2001    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     0.141
           2002    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     0.133
           2003    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 -0.042
    d(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   0.014
    d(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          cuoio
                          tessabb         legno    carta    coke     chem                  metal
                                                                              gom plamin nmet           mecc    ele      mez tra oth man

    Correlation
    Across industries
            1995 0.59
            1996 0.53
            1997 0.53
            1998 0.70
            1999 0.74
            2000 0.59
            2001 0.59
            2002 0.56
            2003 0.64
     d(1995-99) 0.76
     d(1999-03) 0.55
     d(1995-03) 0.79
     Over time alim             cuoio
                          tessabb         legno    carta    coke     chem                  metal
                                                                              gom plamin nmet           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: OSS
     Absolute 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                 0.000
            1996 -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 -0.001
            1997 -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 -0.003
            1998 -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 -0.001
            1999 -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 -0.003
            2000 -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 -0.004
            2001 -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 -0.003
            2002 -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 -0.003
            2003 -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 -0.002
     d(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 -0.002
     d(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                 metal
                                                                            gom plamin nmet        mecc    ele      mez tra oth man

     Correlation
     Across industries
             1995 0.62
             1996 0.65
             1997 0.63
             1998 0.56
             1999 0.63
             2000 0.63
             2001 0.62
             2002 0.51
             2003 0.55
      d(1995-99) 0.73
      d(1999-03) 0.24
      d(1995-03) 0.39
      Over time alim       tessabbcuoio   legno    carta    coke    chem                 metal
                                                                            gom plamin nmet        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




 Total intermediates   Domestic intermediates   Imported intermediates
SYMMETRIC I-O TABLES
                                   costi di produzione interna sostenuti
Domestic use                       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
SYMMETRIC I-O TABLES
Imported use




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

								
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