Business services are an important component of the competitiveness of a country, not only because of their direct effect on the economy, but also for their impact on manufacturing. The development of the business services sector allows manufacturing firms to outsource tasks and activities to “specialists”, that can perform them at lower costs and possibly better. In Italy the business services sector depends crucially on foreign inflows and the small size of Italian firms suggests that for them to outsource is more feasible than internalizing the services (too costly). In our paper we analyze the effect of foreign direct investment in business services on Total Factor Productivity (TFP) of Italian manufacturing firms, over the period 2003-2008. More precisely, we test the presence of vertical linkages between foreign business professionals and domestic manufacturing firms at a highly disaggregated geographical level (i.e. Italian provinces). Our results, consistent across provinces, sectors and several econometric specifications, show that FDIs in business services have a positive impact on TFP. However their effect differs depending on the level of technology of the sectors and on the availability of skilled labor in the province; high tech sectors, such as mechanics and machinery seem to benefit more. From a structural point of view the presence of foreign business professionals has a significant aggregate impact on Province economies. The increase in efficiency in production processes, in fact, is likely to generate a greater market for skilled labor and as a results a growth in employment and wages in the long-run. Hence, to reduce the barriers still protecting FDI in services may turn out to be a positive sum game: foreign service providers can bring in new technologies and know how providing services needed by Italian manufacturing firms to keep (or enhance) their competitiveness and a possibly generates a catching-up process among Provinces.
Do FDI in Business Services Affect Firms’ TFP? Evidence 23 from Italian Provinces / Massimo Armenise; Giorgia Giovannetti; Gianluca Santoni. - STAMPA. - (2015), pp. 195-218. [10.1007/978-3-642-55203-8_9]
Do FDI in Business Services Affect Firms’ TFP? Evidence 23 from Italian Provinces
GIOVANNETTI, GIORGIA;
2015
Abstract
Business services are an important component of the competitiveness of a country, not only because of their direct effect on the economy, but also for their impact on manufacturing. The development of the business services sector allows manufacturing firms to outsource tasks and activities to “specialists”, that can perform them at lower costs and possibly better. In Italy the business services sector depends crucially on foreign inflows and the small size of Italian firms suggests that for them to outsource is more feasible than internalizing the services (too costly). In our paper we analyze the effect of foreign direct investment in business services on Total Factor Productivity (TFP) of Italian manufacturing firms, over the period 2003-2008. More precisely, we test the presence of vertical linkages between foreign business professionals and domestic manufacturing firms at a highly disaggregated geographical level (i.e. Italian provinces). Our results, consistent across provinces, sectors and several econometric specifications, show that FDIs in business services have a positive impact on TFP. However their effect differs depending on the level of technology of the sectors and on the availability of skilled labor in the province; high tech sectors, such as mechanics and machinery seem to benefit more. From a structural point of view the presence of foreign business professionals has a significant aggregate impact on Province economies. The increase in efficiency in production processes, in fact, is likely to generate a greater market for skilled labor and as a results a growth in employment and wages in the long-run. Hence, to reduce the barriers still protecting FDI in services may turn out to be a positive sum game: foreign service providers can bring in new technologies and know how providing services needed by Italian manufacturing firms to keep (or enhance) their competitiveness and a possibly generates a catching-up process among Provinces.
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