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 198095
199503
199500
2000-03
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 198095
199503
199500
2000-03
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
Source:
own
Bern
– calculation
October from
18, ISTAT
2006 - 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
Source:
own
from ISTAT
Bern
– calculation
October 18,
2006 - 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
Source:
own
from ISTAT
Bern
– calculation
October 18,
2006 - 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

GROWTHLPit   GROWTHKL it   aI i  bTt   md  OSM d

it

  sd  OSS d

it

  mf  OSM
f

it

  sf  OSS f

it
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
 eit
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
Hanson
Osm
Feenstra
Hanson
Osm
Lagged
Osm, Oss
Lagged
Osm, Oss
Lagged
Feenstra
Hanson
Lagged
Feenstra
Hanson
Our Osm,
Oss
Our Osm,
Oss
FeenstraHanson
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)
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)
Interaction terms
Adjusted RSquared
RMSE
# observations
.51
.58
.47
.51
.32
.27
.30
.29
.34
.50
.33
.26
.027
.034
.028
.036
.032
.041
.041
.042
.031
.037
.031
.316
112
112
112
98
98
98
98
112
112
112
98
Bern – October 112
18, 2006
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
0.006
0.006
d(1995-03)
0.005
0.003
0.004
0.008 0.018 -0.004 -0.002 -0.007
alim
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
0.88
0.139
0.039
0.021
0.007
0.001
-0.005
0.002 -0.017 -0.005 -0.007
-0.021
0.014
0.010 -0.011 -0.031 -0.028
tessabbcuoio
legno
carta
coke
chem
gom plamin nmet
metal
mecc
ele
mez tra oth man
tessabbcuoio
0.99
0.99
legno
0.90
carta
0.95
coke
0.93
chem
0.97
gom plamin nmet
metal
0.70
0.93
0.96
mecc
0.93
ele
0.95
mez tra oth man
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
alim
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
0.90
0.003
0.005 -0.024 -0.011
0.002 -0.006 -0.009 -0.004 -0.023 -0.004
tessabbcuoio
legno
carta
coke
chem
gom plamin nmet
metal
mecc
ele
mez tra oth man
tessabbcuoio
0.95
0.87
legno
0.77
carta
0.00
coke
0.78
chem
0.68
gom plamin nmet
metal
0.71
0.58
0.79
mecc
0.79
ele
0.92
mez tra oth man
0.44
0.86
FH measure of service outsourcing
SYMMETRIC I-O TABLES
Total intermediates
Domestic intermediates
Imported intermediates
SYMMETRIC I-O TABLES
Domestic use
costi 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
SYMMETRIC I-O TABLES
Imported use
Supply
I.P.I.
I.I.C.