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Outsourcing versus integration at home or abroad and firm heterogeneity

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This paper analyzes the location (at home or abroad) and the mode of organization (outsourcing versus integration) of intermediate inputs production, using data on a sample of Italian manufacturing companies and focusing on the role of firm heterogeneity. We find evidence of a productivity ordering where foreign integration is chosen by the most productive firms and domestic outsourcing is chosen by the least productive firms; firms with medium-high productivity choose domestic integration, firms with medium-low productivity choose foreign outsourcing.

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  1. After completing this paper, I became aware of research by Kohler and Smolka (2009), who use firm-level data for Spain with a similar structure to our data. They find that higher-productivity firms are more likely to acquire inputs from a vertically integrated supplier. This effect is stronger for high levels of capital intensity.

  2. Unfortunately, the following waves of MCC surveys did not include questions on firms’ sourcing strategies. Such information was generally missing in other firm-level databases too. The results reported in this paper cannot therefore be taken as evidence on the most recent trends of the Italian economy.

  3. The regression should not be thought of as a structural model, in which productivity is actually caused by explanatory variables. It should rather be interpreted as a way to get conditional means, i.e. the average productivity premia (or discounts) for firms following a given organizational form, relatively to other firms and conditional on a set of factors. The reader is referred to Sect. 4.3 for a discussion of endogeneity issues.

  4. Data on skills and innovation are not available for 9.0% of firms in our sample (119 out 1,316 firms).

  5. Unfortunately there is no information on productivity after 1997 in our data.

  6. The results are robust to changes in the period over which the growth rate of productivity and its lagged level are measured.


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I am grateful to an anonymous referee, Alfonso Rosolia, Luigi Federico Signorini, Marcel Smolka, Lucia Tajoli, Roberto Tedeschi, Davide Vannoni and participants to the 10th ETSG Conference in Warsaw, the 2nd FIW Research Conference “International Economics” in Vienna, the Centro Studi Luca d’Agliano Conference on “Innovation, Internationalization and Global Labor Markets” in Turin and the INFER Workshop on “Firm and Product Heterogeneity in International Trade” in Brussels for their useful comments. I am also grateful to Alessandra De Michele for editorial assistance. The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Italy.

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Correspondence to Stefano Federico.

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Federico, S. Outsourcing versus integration at home or abroad and firm heterogeneity. Empirica 37, 47–63 (2010).

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