Global Value Chains and the Great Recession: Evidence from Italian and German Firms. Antonio Accetturo, Banca d Italia*

Transcription

1 Global Value Chans and the Great Recesson: Evdence from Italan and German Frms Antono Accetturo, Banca d Itala* Anna Gunta, Unverstà Roma Tre Abstract Accordng to some recent research, Global Value Chans have been one of the man transmsson mechansms of the Great Trade Collapse that severely and smultaneously ht all OECD countres n Pervasve as t has been, t also appears that the mpact of the crss on frms nvolved n Global Value Chans has been hghly heterogeneous. Our paper ntends to contrbute to ths very recent and ongong debate, provdng a descrpton of the effects of the crss from a perspectve that s both countrycomparatve, Germany and Italy beng the countres taken nto consderaton, and on frm level, as we pay partcular attenton to the postonng of the frms along Global Value Chans,.e., whether ntermedate or fnal frms- and to ther characterstcs. Three are the man conclusons: ) ntermedate frms were ht by the crss more than fnal frms; ) among ntermedate frms, the ones that nvested n human captal and carred out product nnovaton actvtes n the prevous perod (before 2008) were somewhat sheltered by the effect of crss; ) frms postonng n GVCs and ther strateges may help to explan part of the performance gap between Italan and German frms. Key words: Global Value Chans, Germany, Italy, Industral Frms, Frm Organzaton Jel Classfcaton: D230, L220, F230 *The Authors wsh to thank Salvatore Ross for nsghtful dscussons and suggestons; Gorgo Barba Navarett, Matteo Bugamell, Marcello Pagnn and Robert Steher for useful comments on a prevous verson of the paper. The vews expressed n the paper are those of the authors and do not necessarly correspond to those of the Bank of Italy. Prelmnary Draft Ths verson: 15 May

2 1. Introducton A growng body of lterature over the past twenty years consders that a structural change n the productve economy has occurred as a further consequence of the ICT revoluton, the steady lowerng of trade barrers and transport costs (Feenstra, 1998), and the changng nature of multnatonal enterprses (Salola and Zanfe, 2009). The outcome s a new nternatonal dvson of labor n whch the producton of fnal products s fragmented n Global Value Chans (GVCs henceforth). Under ths nterpretaton, one may consder the producton process for any gven good as a contnuum of tasks assgned to the varous productve unts; these tasks can be performed n several dfferent places around the world. The organzaton of producton vares contnually, wth each task offshored to the country where the producton and nternatonal transacton costs are lowest. Accordng to Mroudot and Ragousss (2009), trade n ntermedate nputs represents a share of between 56% and 73% of overall trade flows n goods and servces for developed economes. In the face of the great recesson, the systemc mportance of GVC proved to be sgnfcant. Accordng to several studes, GVCs acted as a channel for the rapd transmsson of real and fnancal shocks, thus amplfyng the natonal fluctuatons of demand for fnal goods. Baldwn (2009) holds that the synchrony of the collapse n world trade was precsely caused by the nput-output lnkages n GVCs. Moreover, recent research shows that the mpact of the crss on frms performance s sensbly dfferent accordng to the organzatonal mode of global transactons (Altomonte et al., 2012) as well as by frms postonng n the GVCs (whether outsourcer or ntermedate, Bekes et al., 2011). The am of ths paper s to contrbute to ths recent debate by analyzng the mcroeconomc organzatonal characterstcs and performances of frms nvolved n GVCs usng the EU-EFIGE/Bruegel-UnCredt survey (henceforth Efge). We frst make an account of the dfferences between fnal and ntermedate frms n terms of sze, productvty and 2

3 sales dynamcs durng the crss. We then focus on frms characterstcs n terms of nternatonalzaton, nnovaton and human captal accumulaton to detect possble systematc heterogenetes between fnal and ntermedate frms. Then, n the econometrc part of the paper, we compare the dynamcs of sales durng the crss by dstngushng between ntermedate and fnal frms and, wthn each group, accordng to the company s characterstcs. We explot the cross-natonal nature of the Efge dataset by comparng German and Italan ndustral frms, payng partcular attenton to ther postonng n GVCs. Germany and Italy are somewhat paradgmatc countres and provde to be an nterestng area of applcaton as: ) they are both hghly ndustralzed countres and leaders n EU manufacturng exports; ) ndustral frms of both countres are substantally nvolved n and affected by globalzaton; ) a large share of frms (hgher n the Italan ndustry) work exclusvely as ntermedate frms, a key factor n our analyses to explan heterogeneous reslence to the crss. The crss s a partcularly nterestng case for many reasons. Frst, t was qute unexpected and orgnated from the US fnancal crss of the summer of Ths mples that t can be consdered exogenous to the German and Italan economc condtons. Second, the downturn was partcularly severe. German and Italan GDP fell by, respectvely, 4 and 7 per cent n two year; the crss can be consdered as a serous stress test for frm s strategc decsons. Thrd, as ponted out before (Baldwn, 2009; Altomonte et al., 2012), GVCs had a prmary role n transmttng the crss worldwde; ths mples that frms nvolvement n the crss can be consdered frst rate. Our results show that ntermedate frms are on average smaller, less productve than fnal frms. Ther strateges are also somewhat less ambtous n terms of human captal accumulaton and nnovaton, whle ther nvolvement n export actvtes does not seem partcularly dfferent. The econometrc part shows that the crss ht frms n GVC n an 3

4 asymmetrc way. Intermedate frm observed a more severe contracton of sales, whle frms n a more downstream poston (.e. purchasers of specalzed ntermedares) regstered a less crtcal turnover reducton. However, heterogenety among frms matters. The contracton of turnover was smaller for hgh human captal ntermedate frms. All n all, the postonng wthn the GVC and ther characterstcs help n explanng part of the dfference n performance between German and Italan frms. A methodologcal dsclamer s worth makng. Ths s bascally a descrptve paper that ams at establshng some stylzed facts on the mcroeconomcs of GVCs n the face of the great recesson; ths mples that, n regresson analyses, we cannot make any serous clam of causalty between frm characterstcs (e.g. ntermedate vs. fnal) and ther performance durng the crss due to the presence of serous endogenety problems (selfselecton nto the ntermedate group or omtted varable bases). Keepng ths n mnd, we deem to make a relevant step forward n the growng body of emprcal lterature on GVCs (that we revew n the next secton) under three man aspects. Frst, we make a cross-country analyss for two developed and hghly ndustralzed economes; ths s an mportant ssue snce most of the exstng lterature focuses on emergng markets frms and ther chances to access GVCs. Second, unlke developng countres n whch ntermedate frms preval, advanced economes are characterzed by the coexstence of both fnal and ntermedate frms; ths mples that they are on the verge to become ether a headquarter or a factory economy (Baldwn, 2011). By analyzng frm performance durng a great economc shock, we are able to understand whch s the best specalzaton of a country under extreme economc condtons. Thrd, as heterogenety matters, the analyss of the mcro dynamcs at frm level s partcularly relevant n terms of strateges and ther ablty to face a major macroeconomc shock. The structure of the paper s as follows. Sectons 2.1 revews the most relevant theoretcal and appled lterature concernng behavor and performance of frms nvolved n GVCs, 4

5 whle Secton 2.1 makes a comparson between Italy and Germany n terms of nvolvement n GVCs; Secton 2.3 analyzes the very recent debate on the role of GVCs as transmsson mechansms of the fnancal crss. Secton 3 presents the data. Secton 4.1 shows some descrptve statstcs n terms of partcpaton to GVCs and performance; whle Secton 4.2 presents the analyss to detect heterogeneous characterstcs among frms. Secton 5 analyzes the performance of the frms durng the crss by settng up the estmaton methods and presentng the man results. Secton 6 concludes. 2. Frms n the GVCs 2.1 A bref lterature revew Organzaton and performance of frms nvolved n GVCs have been under scrutny by two very dfferent streams of lterature. To the frst one, based on the theory of the frm, belong the models by Meltz (2003); Antras and Helpman (2004); Helpman et al. (2004); Helpman (2006). They have analyzed whch sourcng strategy (.e., the make-or-buy and where-to-make-or-buy organzatonal choces) frms choose n order to nternatonally organze ther producton. Based on the hypothess of frms heterogenety, ths stream of lterature lnks frms organzatonal choces wth the varous forms of nternatonalzaton. The man predctons (Antras and Helpman, 2004) are that there exsts a productvty orderng such that the most productve frms engage n Foregn Drect Investments, whle less productve frms choose nternatonal outsourcng and domestc frms vertcally ntegrate at home. Emprcal support to the theoretcal predcton of Antras and Helpman models come from several studes, such as: Tomura (2005 and 2007); Anderson et al.; (2008); Federco (2009); Kohler and Smolka (2009). 5

6 In such analyses (both theoretcal and emprcal), the mssng element s the other sde of the con, the complementary agent of the global operaton,.e. the frm that produces as suppler to other frms rather than as manufacturer of the fnal product. Here we come to the other stream of the lterature that has analyzed organzaton and performance of frms nvolved n GVCs, payng more attenton to the role and the upgradng processes of suppler frms. Ths stream of lterature was ntated by Gereff (1994) and subsequently enhanced by contrbutons of Gereff and Korzenewcz (1994), Gereff (1999), Henderson et al. (2002) and Humphrey and Schmtz (2002). Most applcatons are based on clusters of frms operatng n developng countres, that jon the GVCs has a partal substtute for full home based ndustralzaton processes, followng a new path for ndustralzaton. Dfferently from the emprcal studes before revewed, most emprcal analyses, based upon the Global Value Chan Approach predctons, are made of descrptve case-studes, rather than based on econometrc nvestgatons of representatve samples. 1 The dstnctve feature of the Global Value Chan Approach, relevant to our nvestgaton, s essentally how partcpaton n GVCs may affect the performance of an ntermedate frm, thus enhancng the probablty to move up the value chan. In partcular, scholars focus on factors contrbutng to the mproved frm performance or upgradng of frms n the GVCs. At least four dstnct channels of upgradng are envsoned: (a) product nnovaton (ncreasng the ablty of suppler frms to satsfy hgher value added, more sophstcated products Dolan and Humphrey, 2000; Bar and Gereff, 2001; Bazan and Navas-Aleman, 2004; Gulan et al., 2005 or enlargng product lnes); (b) process nnovaton (ncreasng the techncal effcency of the producton process); (c) functonal upgradng (mprovng the qualty of suppler s operatons along the GVCs, or movng to hgher qualty functons, e.g., from producton to desgn); and (d) nter-chan upgradng 1 The absence of good qualty frm level data (Sturgeon and Gereff, 2009) may explan why most of such emprcal analyses have been based on detaled case-studes, surveys and anecdotal evdence rather than on statstcal nvestgatons. 6

7 (applyng the competence acqured n a partcular functon so as to move nto a new chan). Thus, accordng to the Global Value Chan Approach, frms techncal and relatonal abltes can be determnants of supplers performance. In partcular, the propensty to penetrate foregn markets, on the one hand, and the ablty to ntroduce process and product nnovatons, on the other, are often vewed as mportant determnants of a frm s ablty to explot the opportuntes offered by partcpaton n GVCs. The predctons of the Global Value Chan Approach have been tested n recent artcles (Accetturo et al. 2011; Accetturo et al., 2012; Gunta et al., 2012; Agostno et al., 2014) for the case of Italan ndustral suppler frms. All found that, to some extent, supplers able to penetrate foregn markets and to carry out nnovaton (organzatonal, product and process) exhbt labour productvty performance smlar to fnal frms, whereas tradtonal (.e. non-exportng and non-nnovatng) supplers have lower productvty than fnal frms Italan and German frms n the GVCs From a statc pont of vew, Germany and Italy are smlar under many respects. Manufacturng s promnent n both countres: n 2010, n Germany equals to 25,3% of total value added and n Italy 23,3%. The producton structure s qute smlar: famlyowned German frms represent 90% of total frms, 86% n Italy (Bugamell et al., 2012). Foregn markets penetraton of manufacturng products s hgh n both countres: share of exports to German GDP s 39.9%, n Italy 23.4%. A starker dfference s, nstead, represented by the sze of the frms: the average number of employees n Italan frms was 9 n 2009, whle n Germany was 37. Both countres share a great nvolvement n GVCs. Largely as outward processng trade, the global operaton of frms started qute early n Germany (Helg and Tajol, 2005) and 2 On the contrary, Kmura (2002), for Japanese frms, and Razzoln and Vannon (2011) for Italan ones, nvestgatng the relatve performance of supplers, have documented a proftablty and productvty gap n whch supplers are dsadvantaged relatve to other producers. 7

8 accelerated around the 1990 s, after the unfcaton process, wth the ncreasng commercal ntegraton wth Poland, Slovaka, Czech Republc, and Hungary. Foregn outsourcng started somewhat later n Italy (n the second half of the 90s) as a frms reacton strategy to shocks such as stronger compettve pressure from Eastern European and Asan producers; exchange rate constrants before the ntroducton of the sngle European currency; and the development and spread of ICTs. As underlned by Breda and Capparello (2012), f the drect and ndrect mport content of the producton of goods and servces s taken as an ndcator of nternatonal outsourcng, we wll apprecate another smlarty between the two countres. In 2007, such ndcator was around 17% for both the Italan and the German economes: on ths bass and from a statc vewpont, also Italy could be defned as a «bazaar economy» 3 (Breda and Capparello, 2012, 133). 2.3 Frms n GVCs, facng the great recesson World trade experenced a sudden, severe, and synchronzed collapse n late 2008 the sharpest n recorded hstory and deepest snce WWII (Baldwn, 2009). World trade n manufactures fell by about 30% between the frst half of 2008 and the frst half of 2009 (WTO, 2009). The fall n trade durng the crss has also been qute homogeneous across all countres: more than 90% of OECD countres have exhbted smultaneously a declne n exports and mports exceedng 10% (Martns and Araújo, 2009). Accordng to the recent work of several researchers, 4 GVCs had a leadng role n the transmsson of the shocks n the crss, causng the Great Trade Collapse. Why were GCVs regarded as the man propagaton of the global downturn? Whch were the transmsson mechansms? The man dea s that because of the vertcal specalzaton and lnks among frms, reducton of the fnal demand wll be amplfed more than t would be 3 The label bazaar economy comes from Snn (2003), suggestng that Germany sells products that were not produced n the country. 4 For a lvely debate on these ssues see also Voxeu 8

9 mpled by the standard trade channel (Bems et al., 2010). In Y (2009) ths wll happen because the same component mght be exchanged several tmes (and crosses several natonal borders) before t s fnally ncorporated n the fnal product. Alessandra et al. (2011) test another lkely channel of transmsson based on the nventory adjustments frms adopt to face the demand reducton. As a consequence of a reducton n the fnal demand, fnal frms decreased orders across GVCs frms. On the other hand, Escath et al. (2010) agree only partally on the role played by the nventory effect. In the same sprt, but pursung a somewhat dfferent lne of analyss, s the work of Altomonte et al. (2012). The latter do recognze that magntude of the drop s caused by the exceptonally negatve growth rates of both ntermedates and captal goods, whch are orgnated by the emergence of GVCs. The novelty of ther approach concerns the ntroducton of the pecular modes of organzaton of nter-frm lnkages as a key factor to explan frms dfferent reslence durng the crss, for both mports and exports. In ther analyses, based on a representatve sample of French frms, they sngle out two organzatonal modes: the frst one pursued by multnatonal frms that ental trade among related partes; whle, accordng to the second one, the relatonshp between buyer and suppler s carred out by arm s length trade. They found that trade orgnated wthn herarches of frms (.e. transactons among frms belongng to a group) reacted faster to the negatve demand shock but also recovered faster n the followng months than arm s length trade: our explanatory hypothess s that the nternalzaton of actvtes wthn the boundary of a group allows for a better management of nformaton flows comng from the bottom of the value chan so that producton and nventores can be more swftly adjusted to demand shocks (Altomonte et al., 2012, 22). Békés et al. (2011) shed some more lght on the lnk between GVCs and dfferent mpacts they had on frms, hghlghtng that frm s postonng n GVCs do matter. On the bass of a 9

10 survey over 14,000 manufacturng frms operatng n Europe: Germany, France, Italy, Span, Austra, Hungary, and the UK, they show that n 2009 outsourcers regstered 1.8 percentage ponts smaller reducton n sales, whle supplers sale contracted more. 3. Data 3.1 The Efge dataset For the comparatve analyss of frms n the GVCs between Germany and Italy we use the Efge survey. The data have been collected wthn the EFIGE project European frms n a global economy: nternal polces for external compettveness supported by the Research Drectorate General of the European Commsson. The sample ncludes around 3,000 frms for France, Germany, Italy and Span, more than 2,200 frms for UK, and 500 frms for Austra and Hungary. Samplng desgn follows a stratfcaton by sector and frm sze, that nduces an oversamplng for large frms. The sample s representatve for the local populaton of frms, as shown by Barba Navarett et al. (2011). The survey questonnare contans both qualtatve and quanttatve data on frms characterstcs and actvtes, splt nto sx sectons provdng dfferent peces of nformaton on: structure of the frm; workforce; nvestment; technologcal nnovaton and R&D; nternatonalsaton; fnance; market and prcng. 5 Data from the survey was then matched wth balance sheet nformaton from Amadeus (Bureau Van Djk). 6 As ths paper focuses on the two major ndustral economes of the Euro area, we make use of the Italan and German frm data. Ths should leave us wth slghtly less than 6,000 observatons. However, the number of frms actually used n the analyss s much lower (slghtly more than 4,000, roughly 2,000 for each country) due to the presence of several mssng values n the balance sheet data. 5 The questonnare can be found at the webste 6 We consder all the manufacturng frms, food and beverages excluded, due to the countercyclcal nature of these ndustres. 10

11 3.2 Varables and descrptve statstcs The am of the paper s to analyze the mpact of the partcpaton to a GVC on frm performance durng the crss. Fndng a frm-level proxy for the partcpaton to a GVC s not an easy task. In prncple we should fnd a dataset that contans nformaton on all frm-to-frms lnkages ncludng the type of products bought and sold by each frm. At the best of our knowledge, these knd of data are not avalable; for ths reason we proxy the partcpaton to a GVC wth two varables. The frst ndcates whether a frm partcpates to a GVC as a suppler (.e. n an upstream poston). We use a varable that s the share of total turnover made up by sales of produced-to-order goods to other frms (Share of produced-to-order, SPTO henceforth). Produced-to-order strateges allow customers to purchase products that are specfc to ther needs. Ths s lkely to approxmate n the best way the strct relatonshps that are usually establshed n a GVC. The hgher ths share, the more ntermedate a frm,.e. the lower ts access to fnal consumers. The second sgnals whether a frm partcpates to a GVC as a purchaser (.e. n a downstream poston). We use a dummy equal to one f the frm buys customzed ntermedate goods (Customzed purchases of ntermedares, CPI henceforth), that s components whch are exclusvely manufactured for the frm. Descrptve statstcs are reported n table 1. Frst of all t should be noted that the average number of employees s 55; ths means that the Efge dataset s, as already mentoned, representatve of medum and large frms. Table 1 also shows that SPTO s qute large. On average, more than three-fourth of a frm s sales s made up of sellng of ntermedate goods to other frms. The standard devaton s also qute hgh and t hnts at the exstence of a polarzed world n whch fully ntermedate frms coexst wth fnal ones. The purchase of customzed ntermedares s 11

12 lmted to a small porton of frms (10.4 per cent), meanng that the actual number of frms n a downstream poston s very lmted n the dataset. 4. Descrptve analyss 4.1 Partcpaton to GVCs and performance Table 2 reports the average SPTO and CPI for Italy and Germany by sector. There s a stark dfference between the two countres. Italan SPTO s on average 18 percentage ponts hgher than the German one, and t s larger for all sectors. German CPI s nstead generally hgher, wth the only excepton of the Advanced Mechancs sector. 7 All n all, from a GVC perspectve, Italan frms are more ntermedate than the German ones. Italy s prevalence of ntermedate frms s also proved by table 3. In ths table we defne ntermedate (INT, henceforth) a frms wth a SPTO equal to 100 per cent. Almost twothrds of Italan frms can be defned as ntermedate whereas ths share s equal to 42 per cent n Germany. As n table 2, the pervasveness of ntermedate frms s confrmed n all sectors. Table 4 reports some descrptve statstcs of frms characterstcs and performance. Intermedate frms n the dataset are smaller n terms of both sales and employment and less productve; they also tend to buy less frequently customzed ntermedares. In the perod , they also accumulated a larger decrease n total sales compared wth fnal companes. These dfferences are also confrmed wthn each country, as the rankng between fnal and ntermedate frms s preserved. The only excepton s the CPI ndcator that assumes smlar values for German ntermedate and fnal frms. Ths confrms the dea that German economy has transformed nto a Bazaar economy (Snn, 2003) and that many frms (regardless ther postonng n GVC) have organzed ther own producton chan. 7 Advanced Mechancs ncludes: Manufacture of rado, televson, communcaton equpment, medcal, precson and optcal nstruments, watches and clocks. 12

13 The cross-country comparson also hghlghts the weaknesses of the Italan productve structure and ts dsappontng performance n the crss perod. The gap s partcularly wde n terms of employees whle the labor productvty dscount for Italan frms s larger for fnal frms. In our dataset the dfferental n the performance s also huge Detectng heterogenety So far, the Efge dataset has confrmed a well-known fact: ntermedate frms are usually worse than fnal ones under many aspects rangng from sze to productvty; moreover, durng the recent crss, they also experenced a more dramatc fall n sales. However, a recent stream of lterature has hghlghted the heterogeneous nature of both supplers and fnal frms. Companes tend to dffer from each other n terms of strategc choces to compete n the markets. In order to deduce dfferent characterstcs, we start by analyzng frm s choces n terms of nnovaton, nternatonalzaton and human captal accumulaton. We consder fve varables: - share of employees wth a unversty degree; - share of employees n tranng actvtes; - dummy for the ntroducton of product nnovaton; - dummy for the ntroducton of process nnovaton; - exports share over total turnover. Table 5 presents some descrptve statstcs accordng to the postonng n the GVC. Intermedate frms have less human captal and tend to be engaged more frequently n process rather than product nnovatons. Instead, nternatonal exposure s qute smlar for the two types of frms. 8 Accordng to Eurostat, Industry and Trade Statstcs, between 2007 and 2009, ndustral producton fell by 22.2 per cent n Italy and 16.9 per cent n Germany. Ths hnts that the Efge dataset for Germany s skewed toward more successful frms. 13

14 By analysng these characterstcs accordng to the country of localzaton, nterestng patters emerge. Innovatve actvtes are not partcularly dfferent for Italan and German frms wthn each group. For each type of frms, the pont estmate n one country s not statstcally dfferent from the one n the other. In other words, although n each naton the rankng between fnal and ntermedate frm s preserved, the behavour of each knd of company s not statstcally dfferent from one country to the other. The pcture s totally dfferent when we look at the human captal accumulaton. The latter s defntely more wdespread n Germany than n Italy, although, even n ths case, the rankng between fnal and ntermedate s preserved wthn each country. 5. Econometrc analyss 5.1 Performance durng the crss We now look at the relatonshp between frm performance and ts postonng n GVCs and strategy. We frst estmate the followng equaton: (1) y 1 INT 2CPI X 1Ds 2Dc 3Dg Where frm. y s the cumulated growth rate (n log scale) of sales between 2007 and 2009 for INT s a dummy varable equal to one f the share of produced-to-order sales s 100 per cent. 9 CPI s a dummy equal to one f the frm purchased customzed ntermedares. X s a set of covarates amed at capturng frms heterogenety; t ncludes a control for the ntal (log) level of sales and the number of employees both measured n 2007; t also ncludes the varables descrbed n secton 4.2 (human captal, nnovaton and export share) amed at detectng heterogeneous strateges of the frms. D s and D c are sets of, respectvely, sector and country dummes. equal to one f the frm belongs to a natonal or foregn group. D g are set of dummes 9 The use of a contnuous varable for SPTO delvers very smlar results. Ths s due to the fact that the SPTO dstrbuton s actually bmodal, wth a peak at zero per cent, another peak at 100 per cent and very few ntermedate values. 14

15 The coeffcents of nterest are 1 and 2. 1 captures the correlaton between the performance durng the crss and the ntermedate status of a frm n a GVC. 2 ndcates the nfluence of the downstream postonng n a GVC of a frm on the dynamcs of sales n the perod Equaton (1) s estmated by OLS, standard errors are robust to take nto account the heteroskedastcty concerns. We also exclude from the regressons the frst and the 99 th percentle of the dependent varable to mnmze the mpact of outlers. As ponted out n the ntroducton, coeffcents 1 and 2 cannot be nterpreted n causal way but, rather, as condtoned statstcal assocatons. Ths s due to the possble presence of serous endogenety problems: there can be a number of omtted varables (such as frm s productvty, entrepreneur s ablty) that affect both the frm s decsons (ntermedate vs. fnal or ts strateges) and ts performance durng a perod of crss. Unfortunately, ths problem cannot be easly solved; there are not obvous nstruments that correlate wth companes choces but not wth ts performance. For ths reason, we should consder the estmates of equaton (1) as multvarate stylzed facts on the mcroeconomcs of GVCs. Results are shown n table 6. Column (1) reports a smple specfcaton wth just INT, CPI, country and sector dummes. The coeffcent of INT s negatve and sgnfcant, thus confrmng that beng ntermedate s assocated wth a negatve performance durng the crss. Intermedate frms wtnessed, on average, an addtonal fall n sales by 2.8 percentage pont (n log scale). The coeffcent of CPI s, nstead, postve and sgnfcant. Its pont estmate ndcates that frms engaged n the purchase of customzed ntermedares (.e. n a downstream poston n a GVC) succeeded n lmtng the drop n sales durng the crss by 3.4 percentage ponts (n log scale). Column (2) adds frm-level controls such as the ntal perod (log) levels of sales and employment. The coeffcent for 2007 turnover s negatve and sgnfcant thus showng a 15

16 process of mean reverson. Larger frms (measured n employment) attenuated nstead the fall n sales durng the crss. The coeffcents of INT and CPI are now slghtly larger n modulus although the confdence ntervals greatly overlap. In column (3) we nsert controls for frm strateges and characterstcs. Whle the coeffcents of INT and CPI confrm the prevous results, human captal and product nnovaton varables turn out to be postve and sgnfcant. Ths mples that, controllng for sector, country, frms characterstcs and postonng n the GVC, havng a qualfed workforce or ntroducng new products attenuated the negatve effect of the crss. The effects of process nnovaton, nternatonal exposure or group membershp are nstead not statstcally dfferent from zero. 5.2 Heterogeneous effects We now nvestgate whether frm characterstcs may have dfferent effects accordng to the postonng n the GVC. Ths s done by estmatng a fully nteracted verson of equaton (1). In partcular we run the followng regresson: (2) y CPI 3 1 Results are dsplayed n table 7. X Ds Dg 3INT 2INT * X Ds Dg 3CPI * X Ds Dg 4Dc The frst column reports the coeffcents for fnal, non CPI frms. The second and the thrd contan the coeffcents for the nteracton terms of each varable wth, respectvely, the dummy INT and CPI. Results show that human Captal accumulaton mostly beneftted ntermedate frms as the nteracton term between INT and the share of workforce wth a tertary educaton or n tranng s postve and sgnfcant. Large ntermedate frms were also partcularly sheltered durng the crss, whle nternatonal exposure, that ht fnal or CPI frms, dd not seem to have harmed ntermedate frms. 5.3 Do GVCs explan the Italy-Germany performance gap? 16

17 We fnally analyze whether the postonng wthn a GVC and the frm strateges may help to explan the performance gap between Italan and German frms. As clearly shown n table 4, durng the crss Italan and German frms presented dvergent dynamcs n terms of sales. The Italan structural problems are well known (see Brandoln and Bugamell, 2009, for a comprehensve revew) and they range from the small sze of the frms to backward labor market nsttutons and nclude neffcences of publc admnstraton as well as rgdtes n the servce markets. In the descrptve statstcs of the paper, we have also shown how Italan ndustry s characterzed by a very large number of fully ntermedate frms that performed very badly durng the crss, whle the share of frms engaged n the purchase of customzed ntermedares s comparatvely small. In ths secton, we try to understand whether the hgh number of ntermedate frms n Italy dd contrbuted to the relevant performance gap. To do so, we proceed as follows. We calculate how much of the Italy-Germany frms performance gap s explaned by our econometrc models and then we compute the contrbuton of each set of regressors to the explaned gap. In practce we run followng sx regressons: y 1 D Italy y 2 D Italy Sectors y 3 D Italy Sectors Frm character stcs y 4 D Italy Sectors Frm characterstcs Strateges y 5 D Italy Sectors Frm characterstcs Strateges Postonn g y 6 D Italy Fully nteracted model 17

18 The total explaned performance gap between German and Italan frms s gven by 6 1. The accountng s made by comparng j wth j 1, wth j=1,,6. If j 1 j s postve, part of the performance gap between Germany and Italy s explaned by the varables added n the j+1th regresson. Percentage contrbutons to the total explaned gap s j 1 j computed as. 6 1 Table 8 reports the results for these estmates. Most of the total explaned performance gap (70 per cent) s attrbutable to frm characterstcs such as sze, human captal or nnovatve actvty. However, dfferent postonng n the GVC and (less relevantly) ther nteractons wth frm characterstcs have an mportant role as t explans almost one-fourth of the gap. Ths s not a small number, consderng that ths knd of explanaton of the Italy-Germany frms gap has been overlooked by analysts and polcy makers. 6. Concludng remarks Accordng to recent papers (Alessandra et al., 2011; Altomonte et al., 2012; Baldwn, 2009; Bekes et al., 2011, Bems et al., 2010; Y,2009), GVCs have been one of the man transmsson mechansms of the Great Trade Collapse that severely and smultaneously ht all OECD countres n 2009, thus amplfyng the natonal fluctuatons of demand for fnal goods. The am of ths paper s to contrbute to ths recent debate by lookng at the mpact of the crss on frms performance. To the best of our knowledge, ths s one of the few papers that nvestgates the mcro mpact of the crss on frms nvolved n GVCs. Our research hypothess s that frms postonng along the GVCs whether ntermedate or fnal frms - as well as some frms strateges to ncrease the level of human captal; nnovaton propensty and foregn markets penetraton- play a sgnfcant role n ther 18

19 performance n We compare German and Italan ndustral frms; these two countres provde to be an nterestng area of applcaton as: ) they are both hghly ndustralzed countres and leaders n Europe manufacturng exports; ) ndustral frms of both countres are substantally nvolved n and affected by globalzaton; ) a large share of frms (hgher n the Italan ndustry) work exclusvely as ntermedate frms, a key factor n our analyses to explan heterogeneous reslence to the crss. In our analyses we use the Efge dataset, a unque database that contans both qualtatve and quanttatve data on frms characterstcs and actvtes; the data have been matched wth balance sheet nformaton from Amadeus (Bureau Van Djk). Our descrptve analyss shows that, wthn each country, ntermedate frms are smaller than fnal ones (n terms of both sales and employment) and less productve. In the perod, they also accumulated a larger decrease n total sales compared wth fnal companes. As shown by Altomonte et al. (2012), the result s somewhat expected as the mpacts of a shock on fnal demand are amplfed for frms partcpatng n GVCs whch are located further from the fnal customer: when global demand fell towards the end of 2008 n parallel wth heghtened fnancal uncertanty upstream frms were able to satsfy lower demand mostly by drawng from the large nventores they were holdng. Ths however caused orders across global value chans to decrease substantally and more than proportonally wth respect to the ntal downstream drop n demand, but n lne wth lower future expectatons (Altomonte et al., 2012) The cross-country analyss shows that, n comparson wth German frms, a hgher percentage of Italan ndustral frms are fully ntermedate (they sell 100% of ther turnover to other frms); German frms are nstead more frequently n the purchase of customzed ntermedares, thus hntng at the fact that those companes are usually located n a downstream poston n the GVC. 19

20 The aggregate fgures may mask frms heterogeneous reslence to the crss. In order to dssect such heterogenety, we analyze frms accordng to ther human captal accumulaton, nnovaton strateges or nternatonal projecton. The results shed some more lght on the dfferences between Italan and German frms, the latter beng sgnfcantly more nvolved n a strategy amed at rasng the educatonal levels and tranng of the workforce. The man results of our regressons confrm the fndngs of the descrptve analyss: beng an ntermedate frm s generally assocated wth a more severe contracton of sales durng the crss, whle purchasng specalzed ntermedares (.e. organzng own value chans) somehow sheltered frms durng the crss. However, heterogenety among frms matters. The contracton of turnover for ntermedate frms wth prevously pursued a strategy of ncreasng the human captal level was smaller. Fnally, the cross-country comparson shows how the well-known weaknesses of the Italan ndustry n terms of average frms sze and strateges severely undermne a successful partcpaton n the GVCs, thus castng a shadow over Italy s role n the current and future nternatonal dvson of labor as Italy rsks to become a factory country, to use Baldwn (2011) taxonomy. On the contrary, the hgher share of fnal frms, the larger frms sze, the hgher frms labor productvty partly explan German frms capacty to face the crss and to recover. Whle some lmtatons n the methodology of ths paper have to be addressed n our future research agenda, the correlaton we found between frms postonng n the GVCs, ther strategy and the ablty to face the crss have relevant mplcatons, that seem, so far, overlooked by polcy makers. 20

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25 DESCRIPTIVE STATISTICS No. Obs. Mean Standard Devaton SPTO 4, Customzed purchases of ntermedares 4, Sales n 2007 (1) 4,117 11,282 87,288 Employees n , Labour productvty n 2007 (2) 4, Percentage change of sales , Table 1 Source: Authors calculatons on Efge dataset. Weghted averages accordng to the sample desgn. (1) Thousands of euros. (2) Sales (n thousands of euros) per employee. 25

26 ITALIAN AND GERMAN FIRMS IN GVC Table 2 Share of produced to order sales Italy Customzed purchases of ntermedares Share of produced to order sales Germany Customzed purchases of ntermedares Tradtonal Chemcal Metals Mechancs Advanced mechancs Automotve Other Total Source: Authors calculatons on Efge dataset. Weghted averages accordng to the sample desgn. Tradtonal sectors nclude: Manufacture of textles, leather and furnture; Chemcal ncludes: Manufacture of chemcal products, rubber and plastc products; Metals ncludes: Manufacture of basc metals and fabrcated metal products, except machnery and equpment; Mechancs ncludes: Manufacture of machnery, equpment, offce machnery, computers and electrcal machnery; Advanced Mechancs ncludes: Manufacture of rado, televson, communcaton equpment, medcal, precson and optcal nstruments, watches and clocks; Automotve ncludes: Manufacture of motor vehcles, tralers sem-tralers and other transport equpment. Other ncludes: Manufacture of wood and wood products, pulp, paper and paper products, publshng and prntng, coke, refned petroleum products and nuclear fuel and Recyclng. 26

27 INTERMEDIATE AND FINAL FIRMS IN ITALY AND GERMANY Table 3 Italy Germany Total number of frms % of ntermedate Total number of frms % of ntermedate Tradtonal Chemcal Metals Mechancs Advanced mechancs Automotve Other Total 2, , Source: Authors calculatons on Efge dataset. Weghted averages accordng to the sample desgn. Frms are defned ntermedate f ther share of produced-to-order sales s equal to 100%. 27

28 CHARACTERISTICS OF THE FIRMS Table 4 Intermedate Fnal Sales n 2007 (1) 8,545 14,648 Customzed purchases of ntermedares Employees n Labour productvty n 2007 (2) Percentage change of sales Italy Germany Intermedate (3) Fnal Total Intermedate (3) Fnal Total Sales n 2007 (1) 7,924 14,486 10,277 9,985 14,797 12,794 Customzed purchases of ntermedares Employees n Labour productvty n 2007 (2) Percentage change of sales Source: Authors calculatons on Efge dataset. Weghted averages accordng to the sample desgn. (1) Thousands of euros. (2) Sales (n thousands of euros) per employee. (3) Frms are defned ntermedate f ther share of produced-to-order sales s equal to 100%. 28

29 HETEROGENEITY ACROSS FIRMS Table 5 Intermedate Share w/ unversty degree Share n tranng Product nnovaton Process nnovaton Export share Italy Germany Intermedate Fnal Total Intermedate Fnal Total Share w/ unversty degree Share n tranng Product nnovaton Process nnovaton Export share Fnal Source: Authors calculatons on Efge dataset. Weghted averages accordng to the sample desgn. Frms are defned ntermedate f ther share of produced-to-order sales s equal to 100%. 29

30 POSITIONING IN THE GVC AND FIRMS PERFORMANCE IN Table 6 (1) (2) (3) Intermedate (INT) ** (1.041) ** (1.045) ** (1.046) Customzed purchases of ntermedares (CPI) 3.400** (1.712) 4.332** (1.722) 4.070** (1.744) I*CPI Log(employment) *** (1.097) 4.583*** (1.083) Log(sales) *** (0.843) *** (0.912) Share w/ unversty degree ** (0.040) Share n tranng ** (0.020) Product nnovaton ** (1.068) Process nnovaton (1.048) Export share (0.024) Natonal Group (2.047) Foregn Group (2.545) No. ndustry dummes Country dummy: Italy *** (1.721) *** (1.131) *** (1.159) Constant (2.218) *** (4.898) *** (5.225) R^ No. Obs. 4,117 4,117 4,117 Source: Authors calculatons on Efge dataset. OLS weghted estmates accordng to sample desgn. See eq. (1). Dependent varable: percentage change n sales n the perod All estmates exclude the 1st and the 99th percentle of the dependent varable. Whte-robust standard errors n parenthess. * sgnfcant at 10%, ** sgnfcant at 5%, *** sgnfcant at 1%. 30

31 FIRMS CHARACTERISTICS AND THE CRISIS: FINAL VS. INTERMEDIATE Fnal, no CPI frms Interacton wth INT Interacton wth CPI Table 7 Log(employment) ** (1.592) 4.099** (2.041) (3.036) Log(sales) ** (1.436) (1.768) (3.419) Share w/ unversty degree (0.048) 0.297** (0.090) (0.164) Share n tranng 0.048* (0.029) 0.069* (0.039) (0.660) Product nnovaton (1.505) (2.137) (3.871) Process nnovaton (1.520) (2.075) (3.448) Export share ** (0.038) 0.127** (0.048) (0.074) INT (10.253) CPI (20.144) Group dummes YES (w/nteractons) Industry dummes YES (w/ nteractons) Country dummy: Italy *** (1.159) R^ No. Obs. 4,117 Source: Authors calculatons on Efge dataset. OLS weghted estmates accordng to sample desgn. See eq. (2). Dependent varable: percentage change n sales n the perod All estmates exclude the 1st and the 99th percentle of the dependent varable. Whte-robust standard errors n parenthess. * sgnfcant at 10%, ** sgnfcant at 5%, *** sgnfcant at 1%. 31