Working Paper: CEPR ID: DP2395
Authors: Giorgio Barba Navaretti; Anna M. Falzoni; Alessandro Turrini
Abstract: In this paper we investigate the firm-specific factors that account for the decision to invest in low-wage countries on the part of Italian firms in the textiles and clothing sector. This analysis is motivated by the fact that our survey data show, between 1990 and 1997, a decline of average employment in parent companies, while that in subsidiaries grew substantially. However, correlation and regression analysis show that only employment in parent companies that invested only in low wage countries seem to be negatively related with employment abroad.Our hypothesis is that investments in cheap labour countries are mainly cost-driven, and undertaken by firms that focus on a low-quality, low-cost strategy. We test this hypothesis through a probit analysis. The evidence suggests that investments in cheap labour countries are more likely to be of a vertical type, being relatively more labour-intensive compared with the parent company. Our hypothesis seems to be confirmed empirically. Investments in low-wage countries are more likely to generate abundant intra-firm trade and to be undertaken by firms with low shares of skilled employment.
Keywords: Foreign Direct Investments; Production Relocation; Product Differentiation
JEL Codes: F23; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investments in low-wage countries (LWCs) (F21) | firms focusing on low-quality, low-cost strategies (L10) |
| firms focusing on low-quality, low-cost strategies (L10) | relocation of production to LWCs (R32) |
| higher degree of intrafirm trade (F12) | subsidiaries in LWCs (L22) |
| lower shares of skilled employment in parent companies (J24) | investments in LWCs (G31) |
| labor intensity in firms (J29) | probability of locating FDI in LWCs (F23) |
| investments in LWCs (G31) | changes in employment at home and abroad (J63) |
| technological constraints (O33) | preference for low-quality production in cheaper labor markets (J46) |