Local Spillovers, Production Technology and the Choice to Make and/or Buy: Empirical Evidence from Emilia Romagna Mechanical Industry

Abstract

By exploiting a new rich fi rm-level dataset, this paper investigates the decision to subcontract production activities (outsourcing) with respect to vertically integrate them. In particular, we aim at identifying the main factors underlying the decision to either fully or partially decentralise production activities by mechanical firms located in Emilia Romagna (Italy). In so doing, we fir st account for firm characteristics, such as size, age and the skill composition of the labour force, then we focus on labour costs per employee, product diversity and the presence of the fi rm on international markets. Finally, and differently from previous research, we include in the analysis both the qualitative composition of the production process, as given by the stages of production potentially developed by the fi rm, and the industrial composition of the local market. On this last purpose, we estimate the relationship between the propensity and the intensity of concurrent and total sourcing and the main sources of agglomeration economies identified in the literature: specialisation economies, variety and urbanisation economies. Our estimates show a particularly strong and positive relation between the intensity of 'pure' outsourcing and our measure of variety, workforce skill intensity and the internal composition of production, while a negative relation emerges with respect to firm size, age and labour cost. Results concerning concurrent sourcing, instead, appear weaker, but, differently from the case of full outsourcing, we nd a positive relationship with rm size and product diversity.