Empirics of Vertical FDI and off-shoring Lessons 3 and 4

1
Empirics of Vertical FDI and off-shoringLessons
3 and 4

• Giorgio Barba Navaretti
• Gargnano, June, 11-14 2006

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Objectives

• OBJECTIVES
• Examine if VFDI is indeed a relevant mode of
  investment
• Examine the effects of VFDI (host and home)
• Offshoring of services a different issue?

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Testing for the relevance of the VFDI model the
issue
Standard test of the VFDI model (industry i host
country j) FDIij ß1Tij ß2ScaleEcoi ß3MKT
SIZEj ß4RelFactEndj ß5FactIntensi eij If
ß4lt0 VFDI rejected But it is the interaction
between factor inensities in i and factor
endowments in j that matters The model should
instead be specified as F DIij ß1Tij
ß2ScaleEcoi ß3MKT SIZEj ß4RelF actEndj ß5F
actIntensi ß6RelF actEndj F actIntensi eij,
(8) Its the coefficient ß6 that matters. Test
if ß6gt0
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Example the proximity-concentration
trade-off(US investments ,Brainard, 1997)
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Testing HFDI vs HFDI

• Facts in favour of the predominance of HFDI
• Dominant negative effect of trade costs
• Weak evidence on the importance of relative
  factor endowments
• Affiliates sales mostly directed to the local
  market
• Need to estimates the relative importance of the
  two (Carr et al. (2001), Markusen and Maskus
  (2002) cross country data of activities of US
  MNEs

Horizontal b1gt0, b2lt0, b3lt0, b4lt0 Vertical
b10, b2gt0, b3gt0, b4gt0 RESULTS support HFDI
but note only country variables
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Testing jointly country and sector specific
factors
Yeaple, 2003 Sales of US MNEs
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Testing jointly country and sector specific
factors
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Effects of Fragmenting productionreminding the
predictions

• NOTE INTRASECTORAL RATHER THAN INTERSECTORAL
  EFFECTS
• Skill mix and skill premium
• Home increases, almost uncontroversially
• Host ambiguous
• Scale and productivity
• Home ambiguous
• Scale
• Negative
• Relocation of production and labour substitution
  (VFDI)
• Substitute export (HFDI)
• Positive
• Gain market share
• Product complementarity (export of final and
  intermediate goods).
• Productivity
• Factor mix
• Technological sourcing

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Effects of fragmenting evidence on skill mix

• Home most evidence based on imported
  intermediates and sectoral level data no info
  on source of imported inputs
• Feenstra and Hanson,1996, 1999 offshoring could
  account for about 15 percent of the observed
  increase in the relative wage of non-production
  workers in the US during the 1979-1990 period.
• Falk and Koebel 2002, Strauss-Kahn 2004, Hijzen,
  Görg and Hine 2005, Geishecker and Gorg, 2004
• Limited evidence with firm level data
• Marin on Austria and Germany high skilled
  activities get offshored (questionable)
• Barba Navaretti, Bertola, Sembenelli (2006)
  share of skilled workers rises, Criscuolo 2006
• Whithn MNES skill premium rises (Slaughter, 2000,
  Hansson, 2001, Head and Ries, 2002
• Host
• Feenstra and Hanson, (1997) impact of FDI on the
  demand for skills in maquiladoras in Mexico. FDI
  account for over fifty percent of the increase in
  the share of skilled labour in total wages in the
  late 1980s

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Effects of fragmenting evidence on skill mix 1
Geishecker and Gorg, 2004
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Effects of fragmenting evidence on skill mix 2

• Estimating demand for skills when firms MNEs (IS
  IT REALLY FRAGMENTATION?)
• Slaugther (2000) on US
• Hansson (2001) on Sweden
• Head and Ries (2002) on Japan
• Estimate short run labour demands derived from
  translog cost functions

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Effects of fragmenting evidence on skill mix 3
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Evidence on other firm level effects of
fragmenting

• Survey (Karsten Bjerring Olsen, 2006)
• No clear patterns as to how offshoring/outsourcing
  affects productivity, depends os sector and firm
  level characteristics
• Different ways of looking a the matter (industry
  or firm level evidence??)
• Key methodological issue
• gt Define the right counterfactual

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Estimating the effect of fragmentation
Methodological issues
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Estimating the effect of fragmentation
Methodological issues
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Estimating the effect of fragmentation
Methodological issues
Benchmark hypothetical trajectory if switching
firms had not invested
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Evidence on other firm level effects of
fragmenting

• Barba Navaretti, Castellani and Disdier 2006
• Specific question do firms improve performance
  at home by investing abroad?
• Define the right counterfactual what would have
  happened if firms had not invested abroad?
• Investing in DCs vs. LDCs

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Propensity score

• The effect of investing on performance is
• where 1 denotes performance after the
  investment and 0 the hypothetical performance if
  firms had not invested
• But the last term in unobservable ? we need to
  find an observable counterfactual untreated
  firms
• Propensity score matching computes
• and finds non-investing firms with (almost)
  identical ex ante probability of investing

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Estimators

• Standard matching estimator (SM)
• Difference-in-difference estimator (DID)
• DID accounts for further unobserved differences
  in ex ante performance growth, which were not
  accounted by matching
• Multiple treatment firms can switch both in DCs
  and LDCs

Counterfact. Treatment Non switching
Switching in LDC Multiple treatment
Switching in DC Multiple treatment
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Data

• France 2002 version of the database Enquêtes
  filiales constructed by the Direction of Foreign
  Economic Relations of the French Ministry of the
  Economy, Finance and Industry
• First time investors between 95 and 2000 (80 in
  LDCs and 91 in DCs)
• Italy Reprint for information on Italian
  multinationals (stock and newly established
  subsidiaries)
• First time investors between1993 and 2001 (174 in
  LDCs and 95 in DCs)
• Amadeus database of Bureau Van Dijck
• Balance sheet and employment data
• Information on counterfactual

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Descriptive stat. on national and switching firms (mean) Descriptive stat. on national and switching firms (mean) Descriptive stat. on national and switching firms (mean) Descriptive stat. on national and switching firms (mean) Descriptive stat. on national and switching firms (mean) Descriptive stat. on national and switching firms (mean) Descriptive stat. on national and switching firms (mean)
  National firms National firms Firms switching Firms switching Firms switching Firms switching
  National firms National firms to LDC to LDC to DC to DC
  Italy France Italy France Italy France
N. obs. 17,219 28,645  174 80 95 91
N. of employees 71 89 142 241 304 326
Turnover 15'831 21'411 30'468 80'125 69'754 94'614
TFP 1.6 1.2 2.2 1.9 3 2.0
Value added per employee 50.1 44.4 61.8 58.9 70.9 69.4
Cost of labour per employee 29.8 32.0 29.4 37.7 33.6 41.4
Age 22.1 24.9 24.2 31.8 27.4 25.6
ROI 6.5 6.7 6.1 7.1 7.5 8.0
Current ratio 1.3 1.5 1.3 1.6 1.3 1.7
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Probability of switching for French and Italian firms. Multinomial logit Probability of switching for French and Italian firms. Multinomial logit Probability of switching for French and Italian firms. Multinomial logit Probability of switching for French and Italian firms. Multinomial logit Probability of switching for French and Italian firms. Multinomial logit
  France France Italy Italy
Switching to LDC  
Log TFPi, t-1 1.577 (0.421) 2.001 (0.264)
Log Nb. Employees i, t-1 0.524 (0.138) 0.078 (0.106)
Log Cost of labour per employeei, t-1 0.949 (0.644) -1.299 (0.417)
Log Agei, t-1 0.326 (0.140) 0.256 (0.117)
Return on investments i, t-1 0.013 (1.312) -3.841 (1.033)
Current ratio i, t-1 -0.050 (0.146) -0.319 (0.160)
Switching to DC  
Log TFPi, t-1 1.336 (0.396) 2.170 (0.401)
Log Nb. Employees i, t-1 0.520 (0.117) 0.495 (0.141)
Log Cost of labour per employeei, t-1 1.176 (0.565) -1.703 (0.635)
Log Agei, t-1 -0.090 (0.118) 0.323 (0.152)
Return on investments i, t-1 -0.443 (1.196) -2.056 (1.543)
Current ratio i, t-1 -0.010 (0.119) -0.186 (0.191)
Number of obs 28816 28816 17488 17488
Pseudo R2 0.2567 0.2567 0.1923 0.1923
Asterisks denote significance at 1 (), 5 () and 10 (). Intercept and sector, regional and year dummies not reported Asterisks denote significance at 1 (), 5 () and 10 (). Intercept and sector, regional and year dummies not reported Asterisks denote significance at 1 (), 5 () and 10 (). Intercept and sector, regional and year dummies not reported Asterisks denote significance at 1 (), 5 () and 10 (). Intercept and sector, regional and year dummies not reported Asterisks denote significance at 1 (), 5 () and 10 (). Intercept and sector, regional and year dummies not reported
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Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean) Descriptive stat. on switching firms and matched controls (mean)
  CFT to Sw. Sw. Sw. CFT to Sw. Sw. Sw. CFT to Sw. Sw. CFT to Sw. Sw. Sw.
  to LDC to LDC to LDC to LDC to LDC to LDC to DC to DC to DC to DC to DC
  Italy Italy Italy France France France Italy Italy France France France
N. obs. 161 161 161 71 71 71 87 87 82 82 82
N. of empl. 89 89 115 226.9 226.9 207.8 298.6 278.1 386.4 386.4 274.5
Turnover 19'838 19'838 26'702 68'760.7 68'760.7 70'435.6 59703 63080 106'859.9 106'859.9 84'030.4
TFP 1.8 1.8 2.1 1.7 1.7 1.7 2.4 2.6 1.9 1.9 2.0
Labour prod 52.2 52.2 62.2 54.9 54.9 55.8 58.5 63.5 63.7 63.7 69.7
Wage 28.5 28.5 29.3 37.9 37.9 37.6 32.6 33.1 41.2 41.2 41.1
Age 22 22 23.8 33.0 33.0 31.6 33.4 26.4 32.5 32.5 26.2
ROI 6.7 6.7 6 8.1 8.1 6.9 7.4 7.7 7.9 7.9 8.0
Current ratio 1.3 1.3 1.3 1.6 1.6 1.6 1.3 1.4 1.7 1.7 1.7
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The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy The effect of investing abroad on performance at home France vs Italy
  France France France France Italy Italy Italy Italy
  Effect sw. in LDC Effect sw. in LDC Effect sw. in DC Effect sw. in DC Effect sw. in LDC Effect sw. in LDC Effect sw. in DC Effect sw. in DC
  Coef. Std. Err Coef. Std. Err Coef. Std. Err Coef. Std. Err
TFP growth            
ATT 1-year 0.017 (0.037) 0.047 (0.035) 0.030 (0.020) 0.010 (0.033)
ATT 2-years 0.041 (0.038) 0.056 (0.047) 0.058 (0.030) 0.011 (0.035)
ATT 3-years 0.020 (0.057) 0.050 (0.061) 0.041 (0.035) -0.002 (0.043)
DID 1-year 0.126 (0.060) 0.001 (0.057) 0.063 (0.031) -0.075 (0.055)
DID 2-years 0.125 (0.092) 0.031 (0.068) 0.086 (0.036) -0.074 (0.056)
DID 3-years 0.103 (0.112) 0.012 (0.079) 0.042 (0.048) -0.135 (0.081)
Value Added growth            
ATT 1-year 0.000 (0.037) 0.033 (0.030) 0.017 (0.025) 0.006 (0.032)
ATT 2-years 0.022 (0.045) 0.030 (0.041) 0.063 (0.035) 0.055 (0.047)
ATT 3-years -0.009 (0.049) 0.039 (0.061) 0.045 (0.037) 0.042 (0.044)
DID 1-year 0.059 (0.078) -0.007 (0.045) 0.047 (0.031) -0.063 (0.049)
DID 2-years 0.075 (0.100) 0.003 (0.057) 0.112 (0.041) 0.010 (0.049)
DID 3-years 0.014 (0.102) 0.039 (0.073) 0.090 (0.057) -0.028 (0.057)
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The effect of investing abroad on performance at home (cont.) The effect of investing abroad on performance at home (cont.) The effect of investing abroad on performance at home (cont.) The effect of investing abroad on performance at home (cont.) The effect of investing abroad on performance at home (cont.) The effect of investing abroad on performance at home (cont.) The effect of investing abroad on performance at home (cont.) The effect of investing abroad on performance at home (cont.)
France France France France Italy Italy Italy Italy
  Effect sw. in LDC Effect sw. in LDC Effect sw. in DC Effect sw. in DC Effect sw. in LDC Effect sw. in LDC Effect sw. in DC Effect sw. in DC
  Coef. Std. Err Coef. Std. Err Coef. Std. Err Coef. Std. Err
Turnover growth            
ATT 1-year 0.034 (0.021) 0.029 (0.024) -0.009 (0.022) 0.049 (0.025)
ATT 2-years 0.094 (0.031) 0.097 (0.033) 0.006 (0.026) 0.025 (0.037)
ATT 3-years 0.000 (0.052) 0.121 (0.049) 0.052 (0.042) 0.068 (0.042)
DID 1-year 0.008 (0.036) -0.040 (0.039) -0.044 (0.035) 0.021 (0.039)
DID 2-years 0.062 (0.045) 0.034 (0.049) 0.006 (0.041) 0.026 (0.057)
DID 3-years -0.055 (0.079) 0.061 (0.078) 0.065 (0.055) 0.061 (0.057)
Employment growth            
ATT 1-year 0.049 (0.029) 0.024 (0.018) -0.022 (0.026) -0.033 (0.033)
ATT 2-years 0.047 (0.031) 0.057 (0.027) 0.018 (0.036) 0.063 (0.035)
ATT 3-years 0.051 (0.039) 0.099 (0.039) 0.048 (0.034) 0.040 (0.048)
DID 1-year 0.020 (0.029) -0.027 (0.024) -0.040 (0.038) -0.050 (0.050)
DID 2-years 0.029 (0.036) 0.013 (0.036) 0.027 (0.051) 0.068 (0.052)
DID 3-years 0.012 (0.053) 0.053 (0.045) 0.073 (0.058) 0.068 (0.062)
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Outsourcing material inputs and services firm
level evidence based on imported inputs
Gorg, Hanley and Strobl, 2004
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Off-shoring of high skilled white collars

• Is it a different issue (Markusen 2006)?
• No from the North point of view outsourcing of
  lower skilled workers within an industry
• South you need to explain why a scarce factor of
  production is cheap there (skilled labour)
• Complementary factors
• Not cheap relatively to local unskilled labour
• Trade expansion at the extensive margin and trade
  reversals
• Endless transfer of activities to the South
  (Trefler 2006)
• Remember comparative advantage
• Role of RD institutions

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Conclusions

• Fragmentation is an important empirical
  phenomenon, even when looking at FDI data
• Effects on skill premium in the North likely
  important
• Effects on employment and productivity ambiguous,
  but likely positive