A tale of two bazaar economies:
An Input-Output analysis
for Germany and Italy
by Emanuele Breda and Rita Cappariello
(Banca d’Italia – Economic and financial statistics Department)
International relocation of production
ACQUISITION OF
INTERMEDIATES FROM
FOREIGN SUPPLIERS
(OUTSOURCING)
FDI
(OFF-SHORING)
both phenomena have similar macroeconomic implications:
• a change in import composition
• a rising share of imports in the value of domestic production.
E. Breda - R. Cappariello: A tale of
two bazaar economies
Main references (Europe and rest of the world)
Feenstra and Hanson (1996): in US the share of imported inputs on the
total purchase of intermediate products grew from 5.5 per cent in 1972
to 11.6 in 1990.
Egger and Egger (2003): increase, on average, of the imported inputs as a
share of gross output for 11 European counties between 1990 and 1997.
Hummels et al. (1998, 2001): increasing share of imported goods and
services content in exports for some OECD countries during the 1980’s.
ECB (2005): increase of the import content of exports from 1995 to
2000 for an aggregate of economies of the euro area.
E. Breda - R. Cappariello: A tale of
two bazaar economies
Main references (input-output)
The indicators for international outsourcing are usually obtained
by using trade data and/or information from the INPUT-OUTPUT
TABLES
• The definition
of international outsourcing underlying all these
measures is the one in Feenstra and Hanson (1996):
By [outsourcing] we mean the import of intermediate inputs by domestic firms.
• This definition is much broader than the one considering just
trade resulting from specific relationships between a domestic firm
and a supplier abroad (Grossman and Helpman, 2005).
E. Breda - R. Cappariello: A tale of
two bazaar economies
Main references (input-output) (2)
The advantages of this methodology:
• to provide an exhaustive measure of the phenomenon,
regardless of relationships between domestic producers and
foreign suppliers.
• to avoid an arbitrary dichotomy between intermediate inputs
and other categories of goods which is very common in trade
statistics.
E. Breda - R. Cappariello: A tale of
two bazaar economies
Main references (input-output) (3)
However, these indicators:
• if constructed on technical coefficients of production drawn from
annual I-O tables and the trade data, are based on the strong assumption
that the share of imported inputs is the same in all the industries
(Feenstra and Hanson, 1996; Amiti and Wei, 2005).
• if based upon direct data on imported inputs drawn from the
symmetric I-O tables, use information having a significant delay since
these tables are compiled only every 5 years (ECB, 2005).
E. Breda - R. Cappariello: A tale of
two bazaar economies
References for Germany and Italy




Germany: Sinn (2003, 2006), after having observed a strong
increase in industrial production and exports but a much slower
growth in domestic value-added between 1995 and 2003, used the
expression “bazaar effect” for German economy;
Belke et al. (2007) and Danninger and Joutz (2007) interpreted in
a more “optimistic” fashion these same facts, concluding that
Germany gained from internationalisation and intensified its
trade links with fast-growing markets.
Italy (manufacturing firms): Bugamelli et al. (2008) found a
positive correlation between value-added growth and (lato sensu)
internationalisation;
Barba Navaretti and Castellani (2004) and Federico and Minerva
(2007) found no evidence of negative effects of
internationalisation on the domestic employment level.
E. Breda - R. Cappariello: A tale of
two bazaar economies
Motivations of the paper
Measuring
international
outsourcing by a set
of different indicators
for more recent years
for Italy and Germany
Answer to the questions:
• Was the strong increase in
outsourcing from 1995 to 2000
biased by the cyclical peak of
international trade in 2000?
•Is the Italian economy a
bazaar economy too?
E. Breda - R. Cappariello: A tale of
two bazaar economies
Motivations of the paper (continued)
To reach our objectives:

We use instead the annual use I-O tables of imported inputs
updated up to 2006 and available only for a limited groups
of countries.

This data have been used recently to evaluate the
development of outsourcing in Italy (Falzoni and Tajoli,
2007; Daveri and Jona-Lasinio, 2007) but without any
consideration on methodological issues regarding neither
the measurement of the phenomenon nor any cross-country
comparison.
E. Breda - R. Cappariello: A tale of
two bazaar economies
International outsourcing: concepts and measures
Four different groups of indicators for
outsourcing
Share of Imported
Inputs on Total
Inputs (IITI broad
and narrow)
Import Content
of Production
(ICP and DIICP)
Import Content
of Exports
(ICE and DIICE)
E. Breda - R. Cappariello: A tale of
two bazaar economies
Share of ValueAdded on
Production (VAP)
International outsourcing: concepts and measures (2)

Share of Imported Inputs on Total Inputs (broad version:
Feenstra and Hanson, 1996):
 J
m ji  mi  d i 

IITI _ broad     j 1



m ji  d ji  M  D 
i 1 

n
where mji and dji correspond respectively to the imported and the domestically
produced inputs from industry j=1,.., J used to produce output in industry i=1,..,n,
and M and D are the corresponding totals.
E. Breda - R. Cappariello: A tale of
two bazaar economies
International outsourcing: concepts and measures (2)

Share of Imported intra-industry Inputs on Total intraindustry Inputs (narrow version: Bracci, 2006, Falzoni and
Tajoli 2007), :
 mii  mii  d ii 

IITI _ narrow   

i 1  mii  d ii  M  D  
n
with mii and dii corresponding respectively to imported and domesticallyproduced intra-industry inputs (i.e. the diagonal elements of matrices); mii+dii to
total intra-industry inputs of industry i; M and D to total intra-industry inputs of
the whole economy.
E. Breda - R. Cappariello: A tale of
two bazaar economies
International outsourcing: concepts and measures (3)

Import Content of Domestic Production (Egger and Egger, 2003):
 J m
  j 1 ji

ICP   

yi
i 1 

n


 y i
 Y







Direct and Indirect Import Content of Domestic Production:
 J m  K a d
  j 1 ji k 1 m kj ji
DIICP   

yi
i 1 

n

 y i
 Y







with yi representing the gross output of industry i =1,.., n, 0 ≤ makj ≤ 1 representing a
multiplicative coefficient of the imported input from sector k that is embodied in the
domestic production of sector j, and subsequently utilised as an input in industry i (dji),
and Y being the total output.
International outsourcing: concepts and measures (4)

Import Content of Exports (Hummels and al., 2001; Chen and al.,
2005):
J

  j 1 m ji

ICE   

yi
i 1 

n


 xi
 X







Direct and Indirect Import Content of Exports (BCE, 2005):
 J m  K a d
  j 1 ji k 1 m kj ji

DIICE   

yi
i 1 

n

 xi
 X







with xi representing the exports of industry i =1,.., n and X the total exports of the economy.
E. Breda - R. Cappariello: A tale of
two bazaar economies
International outsourcing: concepts and measures (5)

Share of Domestic Value-Added on Production:
 vi
VAP   
i 1  y i
n
 y i

 Y



where vi is the value-added of industry i=1,.., n.
E. Breda - R. Cappariello: A tale of
two bazaar economies
International outsourcing: concepts and measures (6)

IITI (broad and narrow) indices focus on the firms’ choice between domestic
and external input markets.

ICP and DIICP intend to capture the firms’ substitution of domestic
production with production phases relocated abroad. Since they do not
measure IO (international outsourcing) regardless of the degree of
vertical integration, they can be useful to evaluate the effects of IO on
macroeconomic variables, but less reliable for comparing indices across
industries.

ICE and DIICE are measures of “vertical specialisation” (or proxies for
measuring “globalisation”), that is the production chain that link
different countries, acting either as producers in intermediate stages or as
exporters.

VAP index is decreasing in IO, and its ability to capture industries’ IO is
less straightforward.
E. Breda - R. Cappariello: A tale of
two bazaar economies
Data

Two sets of annual input-output tables (Destatis and Istat)
including the use matrices with a distinction between
domestically produced inputs and imported inputs.

Indices calculated including total purchases of non-energy
products and market services (46 NACE-sectors).
E. Breda - R. Cappariello: A tale of
two bazaar economies
The extent of internationalisation
ITALY
Import content of
production
Sectors
GERMANY
Import content of
exports
Imported IITI_narrow
Value
inputs on
added on
Total inputs
production
direct and
direct and (IITI_broad)
only direct indirect only direct indirect
content
content
content
content
(ICP)
(DIICP)
(ICE)
(DIICE)
Total
of which: Manufacturing
Low-tech
Medium-tech
High-tech
of which: Market services
8.5
16.9
14.4
19.7
24.7
2.6
15.1
26.0
23.2
29.9
32.3
6.7
14.9
17.6
15.2
17.9
27.2
3.3
Total
of which: Manufacturing
Low-tech
Medium-tech
High-tech
of which: Market services
8.9
18.3
15.1
21.5
27.8
2.9
15.6
27.4
24.0
31.4
34.5
7.6
16.8
19.7
16.6
20.2
30.1
3.6
Total
of which: Manufacturing
Low-tech
Medium-tech
High-tech
of which: Market services
9.6
21.0
18.2
24.5
25.7
3.1
16.5
30.4
27.3
35.1
33.2
8.0
18.8
22.5
20.8
23.3
26.0
4.3
1995
23.7
27.1
24.4
28.4
34.3
8.7
2000
25.4
29.1
26.0
30.3
36.1
9.2
2006
27.9
32.4
30.2
34.1
33.2
10.3
Import content of
production
Import content of
exports
Imported IITI_narrow
Value
inputs on
added on
Total inputs
production
direct and
direct and (IITI_broad)
only direct indirect only direct indirect
content
content
content
content
(ICP)
(DIICP)
(ICE)
(DIICE)
16.7
25.6
21.9
29.2
38.7
6.9
27.9
37.8
28.5
53.3
60.9
6.6
44.8
30.1
30.4
28.7
33.4
57.5
7.5
14.1
13.2
15.2
13.8
2.7
11.3
20.4
19.1
22.0
19.7
4.5
1995
14.1
15.6
16.4
15.4
14.4
7.0
16.9
27.5
22.8
31.4
43.2
6.9
29.7
42.2
30.7
57.1
72.0
6.9
42.9
28.9
29.2
27.3
32.4
53.7
9.8
17.5
15.3
19.1
18.6
4.2
14.8
25.1
21.7
28.0
25.6
7.0
17.2
19.3
19.2
19.4
19.5
7.6
18.2
31.1
27.2
35.1
41.0
7.2
32.0
47.5
37.9
61.7
64.2
8.3
42.2
27.2
27.6
25.1
33.5
52.2
11.1
19.8
18.3
20.4
21.6
4.5
16.5
28.2
25.5
30.2
28.9
7.3
18.9
21.4
22.5
20.5
23.0
8.5
Source: our calculations on Eurostat and Istat data.
E. Breda - R. Cappariello: A tale of
two bazaar economies
19.9
22.1
22.5
22.3
20.2
9.1
2000
24.2
27.3
25.7
28.2
26.3
10.6
2006
26.4
30.0
29.6
30.2
30.0
11.6
16.8
23.6
21.9
25.3
23.8
8.6
25.5
33.6
30.2
37.0
34.4
9.6
51.4
36.2
34.8
36.6
39.8
64.3
20.2
27.6
25.2
28.7
30.6
11.4
31.3
40.6
37.8
41.1
44.8
15.3
47.1
32.5
34.1
29.5
37.3
59.1
22.7
30.9
29.5
30.9
35.2
12.5
33.0
41.5
42.7
39.1
47.7
16.7
46.1
31.0
31.1
29.6
36.1
59.0
The extent of internationalisation (2)

In 2006 the overall level of international outsourcing appears
to be comparable between the two countries.

The level of international outsourcing in market services in
Germany is higher than in Italy because of a more intensive use
of imported inputs in the financial and banking sector.

Manufacturing sector seems to be more internationalised in
Italy than in Germany.
E. Breda - R. Cappariello: A tale of
two bazaar economies
The extent of internationalisation in
manufacturing

For every 100 euros of goods produced in high-tech sectors, the
direct ICP was 26 and 22 euros respectively for Italy and
Germany, whereas the DIICP was 33 and 29 euros.

The low-tech sectors are the least internationalised ones in
both countries.

In 2006 the highest values of international outsourcing
indicators are found in high and medium-tech industries.
E. Breda - R. Cappariello: A tale of
two bazaar economies
The extent and development of international
outsourcing: Total economy
25
20
15
10
5
1994
1995
1996
1997
IITI Germany
1998
1999
2000
IITI Italy
2001
2002
ICP Germany
E. Breda - R. Cappariello: A tale of
two bazaar economies
2003
2004
2005
ICP Italy
2006
2007
The extent and development of international
outsourcing : Manufacturing
35
30
25
20
15
10
1994
1995
1996
1997
IITI Germany
1998
1999
IITI Italy
2000
2001
2002
ICP Germany
E. Breda - R. Cappariello: A tale of
two bazaar economies
2003
ICP Italy
2004
2005
2006
2007
The development of international outsourcing
ITALY
GERMANY
Import content of production Import content of exports
Sectors
only direct
content (ICP)
direct and
indirect
content
(DIICP)
only direct
content (ICE)
direct and
indirect
content
(DIICE)
Imported
inputs on
Total inputs
(IITI_broad)
IITI_narrow Value added
on production
Import content of production Import content of exports
only direct
content (ICP)
Percentage variation 1995-2000
Total
of which: Manufacturing
Low-tech
Medium-tech
High-tech
of which: Market services
4.5
8.3
4.9
9.0
12.6
10.9
3.6
5.1
3.5
5.2
6.7
12.8
12.3
12.2
9.4
13.1
10.9
8.6
7.3
7.2
6.7
7.0
5.2
5.7
1.1
7.0
4.0
7.3
11.7
0.3
7.4
14.4
20.3
14.3
-7.5
0.0
5.8
11.2
14.0
11.6
-3.7
0.0
12.3
14.3
25.2
15.1
-13.6
0.0
9.6
11.3
16.1
12.3
-8.0
0.0
7.6
13.3
19.3
11.8
-5.0
0.0
6.4
11.8
7.9
7.1
18.3
5.5
-4.2
-4.2
-3.9
-4.8
-3.2
-6.6
31.4
24.1
15.7
26.1
34.5
55.3
12.3
23.9
26.2
24.6
4.1
16.9
9.6
16.9
17.9
17.4
2.8
19.4
26.2
28.2
37.0
30.2
-4.2
30.8
17.6
19.3
23.9
20.1
-3.2
17.5
8.8
21.3
24.1
20.0
6.1
4.0
30.8
23.4
13.9
27.4
29.8
55.6
21.9
24.2
16.6
25.5
35.6
8.8
22.0
23.5
14.0
26.7
29.9
17.2
20.4
17.2
15.0
13.4
28.5
33.4
23.0
20.7
25.0
11.3
30.5
59.7
-8.4
-10.2
-1.8
-19.4
-6.2
-8.1
12.6
12.0
17.1
7.6
14.8
9.1
5.3
2.3
13.2
-5.0
6.4
9.1
-2.1
-4.6
-8.9
0.1
-3.1
-0.2
35.6
31.2
34.7
22.0
47.5
45.4
29.5
23.4
41.5
5.7
38.8
74.3
-10.3
-14.3
-10.6
-19.3
-9.2
-8.3
Percentage variation 2000-2006
7.5
12.5
23.3
8.0
-10.9
0.0
-1.7
-5.6
-5.8
-8.0
3.3
0.0
13.4
13.0
20.0
6.6
16.1
8.0
Percentage variation 1995-2006
Total
of which: Manufacturing
Low-tech
Medium-tech
High-tech
of which: Market services
only direct
content (ICE)
direct and
indirect
content
(DIICE)
IITI_narrow Value added
on production
Percentage variation 1995-2000
Percentage variation 2000-2006
Total
of which: Manufacturing
Low-tech
Medium-tech
High-tech
of which: Market services
direct and
indirect
content
(DIICP)
Imported
inputs on
Total inputs
(IITI_broad)
11.5
12.3
17.1
7.8
12.9
4.3
10.2
10.8
17.5
5.9
18.4
11.6
9.1
9.9
15.0
6.9
13.9
8.8
Percentage variation 1995-2006
14.4
25.8
33.1
15.8
5.4
26.8
-5.8
-9.6
-9.5
-12.4
0.0
-9.2
49.0
40.2
38.9
34.4
56.1
67.8
Source: our calculations on Eurostat and Istat data.
E. Breda - R. Cappariello: A tale of
two bazaar economies
45.8
38.5
33.4
37.3
46.6
62.3
34.3
37.6
37.0
32.9
60.5
21.5
33.0
35.7
31.1
35.4
48.0
27.5
The dynamics of internationalisation

In the 1995-2000 period very intense growth in both countries,
especially in Germany (and, for Germany in services, which,
however, started from extremely low levels of
internationalisation and have a limited weight on the whole
economy).

Between 2000 and 2004 weaker increase in Germany.

During the same period we can observe a reduction for the
whole Italian economy, which reflects the increasing relative
importance of market services industries.

In the last years under analysis (2005-06), growth resumed at
a fast pace, especially in Italy.
E. Breda - R. Cappariello: A tale of
two bazaar economies
A shift and share analysis
The absolute variation of the indices have been broken down in
two parts:

the change of intensity in industries’ international outsourcing
(the within component).

the change relative to the economy structure (the between
component).
The shift and share analysis is based on 46 sectors (NACE codes)
for the all period (1995-2006).
E. Breda - R. Cappariello: A tale of
two bazaar economies
International outsourcing and sectoral change
between 1995 and 2006
ITALY
GERMANY
Import content of production Import content of exports
Sectors
only direct
content (ICP)
direct and
indirect
content
(DIICP)
only direct
content (ICE)
direct and
indirect
content
(DIICE)
Imported
inputs on
Total inputs
(IITI_broad)
IITI_narrow Value added
on production
Import content of production Import content of exports
only direct
content (ICP)
direct and
indirect
content
(DIICP)
only direct
content (ICE)
Total
Within
Between
Total
1.86
-0.81
1.05
2.51
-1.06
1.45
3.96
-0.06
3.90
4.34
-0.16
4.18
Between
Total
4.28
-0.23
4.05
4.45
-0.12
4.42
4.69
0.26
4.95
4.96
0.29
5.24
2.85
-1.38
1.47
5.56
-1.54
4.02
-4.23
1.77
-2.59
3.05
0.60
3.65
4.43
0.76
5.19
Between
Total
0.38
0.06
0.44
1.40
-0.09
1.30
0.93
0.08
1.02
Source: our calculations on Eurostat and Istat data.
1.82
-0.29
1.53
4.81
0.02
4.83
-0.03
6.58
6.56
4.89
1.08
5.97
5.99
1.51
7.50
-4.77
-0.53
-5.30
4.33
1.02
5.35
6.69
1.35
8.04
-4.72
-0.43
-5.15
2.54
1.37
3.90
4.71
2.40
7.11
-0.80
-4.54
-5.34
Manufacturing
5.58
-0.15
5.43
8.29
1.45
9.74
-3.14
0.18
-2.97
5.11
0.59
5.70
6.94
0.94
7.89
Market services
Within
IITI_narrow Value added
on production
Total
Manufacturing
Within
direct and
indirect
content
(DIICE)
Imported
inputs on
Total inputs
(IITI_broad)
5.73
0.12
5.85
7.66
0.23
7.89
Market services
0.09
0.18
0.28
1.00
0.76
1.75
-6.21
0.90
-5.31
1.48
0.33
1.81
2.40
0.37
2.80
0.59
0.91
1.50
1.67
0.82
2.49
International outsourcing and sectoral change
between 1995 and 2006 (2)

For Italy the s&s analysis confirms an increase in the
international fragmentation for both the whole economy
and the manufacturing sector. This rise is at least partially
counterbalanced by a production shift towards less
internationally integrated industries.

For Germany, both component move in the same direction,
showing a clear increase in the level of outsourcing.

The firms’ propensity to use imported inputs grew within
each sector at a similar pace in both countries, but the shift
of the economic structure towards more internationalised
sectors was stronger in Germany than in Italy. This holds
for the all economy and for manufacturing.
E. Breda - R. Cappariello: A tale of
two bazaar economies
Conclusions

In 2006 Germany and Italy show a similar level of international
outsourcing. Considering the manufacturing only, Italian firms seems to
be ever more internationalised than the German ones. Therefore, we
could consider, by a static point of view, the Italian economy as a “bazaar
economy” too.

Also the dynamic evolution was broadly similar in the two countries:
stronger in the years 1995-2000, weaker (if not negative) during 2001-04;

in the last years under study (2005-06) the growth of indicators resumed
at a fast pace, especially in Italy. This seems to suggest a change in
strategies and a reorganisation of production in Italian firms.

However, German firms’ started from a lower level and experienced a
stronger growth in the 1st sub-period and in the whole period.

For both countries, the highest levels of international outsourcing are
found in high and medium-tech sectors.
E. Breda - R. Cappariello: A tale of
two bazaar economies
Conclusions (2)

Italian lira crises in the first half of the ’90s temporarily boosted
price competitiveness of Italian goods, whereas corresponding
Deutsche mark appreciation triggered German firms’ effort to
compensate for the loss of competitiveness.

In the beginning of the last decade, the decline of IO indicators for
Italian economy was caused by a structural shift in the
production towards services, while in manufacturing sectors IO
continued to grow (albeit slowly).

The growth of indicators in the last years analysed suggests that,
before the international crisis of 2008-09, at least a significant
part of Italian firms was trying to cope with the new challenges
posed by globalisation, by the diffusion of ICT, and by the
adoption of the euro.
E. Breda - R. Cappariello: A tale of
two bazaar economies