Abstract
This study presents an empirical analysis of the production outsourcing effect on firm productivity and profitability in the Italian manufacturing industry. This study uses firm-level panel data that were developed by the Italian National Statistical Institute. Using different estimation strategies, we develop panel data models and correct for possible endogeneity bias of the outsourcing with respect to the target variables. We find a non-significant effect of outsourcing on profitability and a significant negative effect of outsourcing on productivity.
Highlights
The phenomenon of geographically fragmented production processes has become widespread in the last two decades because information and communication technologies (ICT) have divided the value chain and facilitated the performance of activities from any location (Grossman & Helpman, 2005)
This study presents an empirical analysis of the production outsourcing effect on firm productivity and profitability in the Italian manufacturing industry
As for model (3), if no restrictions are imposed on correlation among, and the covariates, we are in the fixed-effect framework and the identifying assumption is that the data-generating process for outsourcing is independent on productivity/profitability once all other variables, including the fixed effects and firm-specific time trends, are taken into account
Summary
The phenomenon of geographically fragmented production processes has become widespread in the last two decades because information and communication technologies (ICT) have divided the value chain and facilitated the performance of activities from any location (Grossman & Helpman, 2005). Ito et al (2010), for example, find that outsourcing, especially when it is international in nature, reduces the short-run productivity of domestic firms The authors explain this effect using the “industrial organisation approach” and suggest that efficiency is gained only with certain foreign market experience. We use a broad ten-wave panel of firms (covering the period 1998-2007), a unique data set of Italian manufacturing enterprises developed by ISTAT (the Italian National Statistical Institute) through the integration of different official business surveys and administrative data sources, that only recently become available for empirical analysis Some features of this panel, such as the large number of firms and industries considered, and the length of the time span covered, offer chances of analysis not permitted by the usually available more limited datasets, which are often cross-section in nature, cover a few industries or a smaller number of firms.
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