A tale of two bazaar economies: An Input-Output analysis for Germany and Italy by Emanuele Breda and Rita Cappariello (Banca dItalia – Economic and financial statistics Department)

E. Breda - R. Cappariello: A tale of two bazaar economies FDI (OFF-SHORING) ACQUISITION OF INTERMEDIATES FROM FOREIGN SUPPLIERS (OUTSOURCING) both phenomena have similar macroeconomic implications: a change in import composition a rising share of imports in the value of domestic production. International relocation of production

E. Breda - R. Cappariello: A tale of two bazaar economies Feenstra and Hanson (1996) : in US the share of imported inputs on the total purchase of intermediate products grew from 5.5 per cent in 1972 to 11.6 in Egger and Egger (2003): increase, on average, of the imported inputs as a share of gross output for 11 European counties between 1990 and Hummels et al. (1998, 2001) : increasing share of imported goods and services content in exports for some OECD countries during the 1980s. ECB (2005) : increase of the import content of exports from 1995 to 2000 for an aggregate of economies of the euro area. Main references (Europe and rest of the world)

E. Breda - R. Cappariello: A tale of two bazaar economies The definition of international outsourcing underlying all these measures is the one in Feenstra and Hanson (1996): By [outsourcing] we mean the import of intermediate inputs by domestic firms. This definition is much broader than the one considering just trade resulting from specific relationships between a domestic firm and a supplier abroad (Grossman and Helpman, 2005). Main references (input-output) The indicators for international outsourcing are usually obtained by using trade data and/or information from the INPUT-OUTPUT TABLES

E. Breda - R. Cappariello: A tale of two bazaar economies Main references (input-output) (2) The advantages of this methodology: to provide an exhaustive measure of the phenomenon, regardless of relationships between domestic producers and foreign suppliers. to avoid an arbitrary dichotomy between intermediate inputs and other categories of goods which is very common in trade statistics.

E. Breda - R. Cappariello: A tale of two bazaar economies Main references (input-output) (3) However, these indicators: if constructed on technical coefficients of production drawn from annual I-O tables and the trade data, are based on the strong assumption that the share of imported inputs is the same in all the industries (Feenstra and Hanson, 1996; Amiti and Wei, 2005). if based upon direct data on imported inputs drawn from the symmetric I-O tables, use information having a significant delay since these tables are compiled only every 5 years (ECB, 2005).

E. Breda - R. Cappariello: A tale of two bazaar economies References for Germany and Italy Germany: Sinn (2003, 2006), after having observed a strong increase in industrial production and exports but a much slower growth in domestic value-added between 1995 and 2003, used the expression bazaar effect for German economy; Belke et al. (2007) and Danninger and Joutz (2007) interpreted in a more optimistic fashion these same facts, concluding that Germany gained from internationalisation and intensified its trade links with fast-growing markets. Italy (manufacturing firms): Bugamelli et al. (2008) found a positive correlation between value-added growth and ( lato sensu ) internationalisation; Barba Navaretti and Castellani (2004) and Federico and Minerva (2007) found no evidence of negative effects of internationalisation on the domestic employment level.

E. Breda - R. Cappariello: A tale of two bazaar economies Measuring international outsourcing by a set of different indicators for more recent years for Italy and Germany Answer to the questions: Was the strong increase in outsourcing from 1995 to 2000 biased by the cyclical peak of international trade in 2000? Is the Italian economy a bazaar economy too? Motivations of the paper

E. Breda - R. Cappariello: A tale of two bazaar economies To reach our objectives: We use instead the annual use I-O tables of imported inputs updated up to 2006 and available only for a limited groups of countries. This data have been used recently to evaluate the development of outsourcing in Italy (Falzoni and Tajoli, 2007; Daveri and Jona-Lasinio, 2007) but without any consideration on methodological issues regarding neither the measurement of the phenomenon nor any cross-country comparison. Motivations of the paper (continued)

E. Breda - R. Cappariello: A tale of two bazaar economies International outsourcing: concepts and measures Four different groups of indicators for outsourcing Share of Imported Inputs on Total Inputs ( IITI broad and narrow ) Share of Value- Added on Production ( VAP ) Import Content of Exports ( ICE and DIICE) Import Content of Production (ICP and DIICP)

E. Breda - R. Cappariello: A tale of two bazaar economies Share of Imported Inputs on Total Inputs (broad version: Feenstra and Hanson, 1996): where m ji and d ji correspond respectively to the imported and the domestically produced inputs from industry j=1,.., J used to produce output in industry i=1,..,n, and M and D are the corresponding totals. International outsourcing: concepts and measures (2)

E. Breda - R. Cappariello: A tale of two bazaar economies Share of Imported intra-industry Inputs on Total intra- industry Inputs (narrow version: Bracci, 2006, Falzoni and Tajoli 2007), : with m ii and d ii corresponding respectively to imported and domestically- produced intra-industry inputs (i.e. the diagonal elements of matrices); m ii +d ii to total intra-industry inputs of industry i; M and D to total intra-industry inputs of the whole economy. International outsourcing: concepts and measures (2)

Import Content of Domestic Production (Egger and Egger, 2003): Direct and Indirect Import Content of Domestic Production: with y i representing the gross output of industry i =1,.., n, 0 m a kj 1 representing a multiplicative coefficient of the imported input from sector k that is embodied in the domestic production of sector j, and subsequently utilised as an input in industry i (d ji ), and Y being the total output. International outsourcing: concepts and measures (3)

E. Breda - R. Cappariello: A tale of two bazaar economies Import Content of Exports (Hummels and al., 2001; Chen and al., 2005): Direct and Indirect Import Content of Exports (BCE, 2005): International outsourcing: concepts and measures (4) with x i representing the exports of industry i =1,.., n and X the total exports of the economy.

E. Breda - R. Cappariello: A tale of two bazaar economies Share of Domestic Value-Added on Production: where v i is the value-added of industry i=1,.., n. International outsourcing: concepts and measures (5)

E. Breda - R. Cappariello: A tale of two bazaar economies IITI (broad and narrow) indices focus on the firms choice between domestic and external input markets. ICP and DIICP intend to capture the firms substitution of domestic production with production phases relocated abroad. Since they do not measure IO (international outsourcing) regardless of the degree of vertical integration, they can be useful to evaluate the effects of IO on macroeconomic variables, but less reliable for comparing indices across industries. ICE and DIICE are measures of vertical specialisation (or proxies for measuring globalisation), that is the production chain that link different countries, acting either as producers in intermediate stages or as exporters. VAP index is decreasing in IO, and its ability to capture industries IO is less straightforward. International outsourcing: concepts and measures (6)

E. Breda - R. Cappariello: A tale of two bazaar economies Data Two sets of annual input-output tables (Destatis and Istat) including the use matrices with a distinction between domestically produced inputs and imported inputs. Indices calculated including total purchases of non-energy products and market services (46 NACE-sectors).

E. Breda - R. Cappariello: A tale of two bazaar economies The extent of internationalisation

E. Breda - R. Cappariello: A tale of two bazaar economies The extent of internationalisation (2) In 2006 the overall level of international outsourcing appears to be comparable between the two countries. The level of international outsourcing in market services in Germany is higher than in Italy because of a more intensive use of imported inputs in the financial and banking sector. Manufacturing sector seems to be more internationalised in Italy than in Germany.

E. Breda - R. Cappariello: A tale of two bazaar economies The extent of internationalisation in manufacturing For every 100 euros of goods produced in high-tech sectors, the direct ICP was 26 and 22 euros respectively for Italy and Germany, whereas the DIICP was 33 and 29 euros. The low-tech sectors are the least internationalised ones in both countries. In 2006 the highest values of international outsourcing indicators are found in high and medium-tech industries.

E. Breda - R. Cappariello: A tale of two bazaar economies The extent and development of international outsourcing: Total economy

E. Breda - R. Cappariello: A tale of two bazaar economies The extent and development of international outsourcing : Manufacturing

E. Breda - R. Cappariello: A tale of two bazaar economies The development of international outsourcing

E. Breda - R. Cappariello: A tale of two bazaar economies The dynamics of internationalisation In the period very intense growth in both countries, especially in Germany (and, for Germany in services, which, however, started from extremely low levels of internationalisation and have a limited weight on the whole economy). Between 2000 and 2004 weaker increase in Germany. During the same period we can observe a reduction for the whole Italian economy, which reflects the increasing relative importance of market services industries. In the last years under analysis ( ), growth resumed at a fast pace, especially in Italy.

E. Breda - R. Cappariello: A tale of two bazaar economies A shift and share analysis The absolute variation of the indices have been broken down in two parts: the change of intensity in industries international outsourcing (the within component). the change relative to the economy structure (the between component). The shift and share analysis is based on 46 sectors (NACE codes) for the all period ( ).

International outsourcing and sectoral change between 1995 and 2006

E. Breda - R. Cappariello: A tale of two bazaar economies International outsourcing and sectoral change between 1995 and 2006 (2) For Italy the s&s analysis confirms an increase in the international fragmentation for both the whole economy and the manufacturing sector. This rise is at least partially counterbalanced by a production shift towards less internationally integrated industries. For Germany, both component move in the same direction, showing a clear increase in the level of outsourcing. The firms propensity to use imported inputs grew within each sector at a similar pace in both countries, but the shift of the economic structure towards more internationalised sectors was stronger in Germany than in Italy. This holds for the all economy and for manufacturing.

E. Breda - R. Cappariello: A tale of two bazaar economies Conclusions In 2006 Germany and Italy show a similar level of international outsourcing. Considering the manufacturing only, Italian firms seems to be ever more internationalised than the German ones. Therefore, we could consider, by a static point of view, the Italian economy as a bazaar economy too. Also the dynamic evolution was broadly similar in the two countries: stronger in the years , weaker (if not negative) during ; in the last years under study ( ) the growth of indicators resumed at a fast pace, especially in Italy. This seems to suggest a change in strategies and a reorganisation of production in Italian firms. However, German firms started from a lower level and experienced a stronger growth in the 1st sub-period and in the whole period. For both countries, the highest levels of international outsourcing are found in high and medium-tech sectors.

E. Breda - R. Cappariello: A tale of two bazaar economies Conclusions (2) Italian lira crises in the first half of the 90s temporarily boosted price competitiveness of Italian goods, whereas corresponding Deutsche mark appreciation triggered German firms effort to compensate for the loss of competitiveness. In the beginning of the last decade, the decline of IO indicators for Italian economy was caused by a structural shift in the production towards services, while in manufacturing sectors IO continued to grow (albeit slowly). The growth of indicators in the last years analysed suggests that, before the international crisis of , at least a significant part of Italian firms was trying to cope with the new challenges posed by globalisation, by the diffusion of ICT, and by the adoption of the euro.