Who benefits from outsourcing? A study of one Italian region's small firms

This paper analyses the production outsourcing of Emilia-Romagna’s small clothing manufacturers, using a new rich firm-level dataset. This dataset has the considerable advantage of containing interesting information about the outsourcing of certain phases of the production process that no other data source offers. The production process of these firms, which may be of a totally integrated or more fragmented nature, is thus analysed, and the effects of outsourcing are investigated. Since the analysis of the impact of outsourcing at the firm level has always focused more on productivity than on profitability (Olsen 2006), we are going to study the impact of outsourcing decisions both on a firm’s value added and on its gross earnings, by estimating econometric models. These models allow us to incorporate a firm’s outsourcing propensity into the impact evaluation, by adjusting for possible selection bias (Amemija 1985; Schnedler 2005). Our findings show that outsourcing has a positive effect on both productivity and, in particular, on profitability, thus confirming that Italian small clothing businesses tend to place immediate profit before productivity and growth.