The productivity of Italian industrial suppliers (1998-2006). Does participation in Global Value Chains matter?

Supplier firms selling intermediate inputs/goods to other producers operate and even proliferate in both developed and developing countries, especially after the considerable decline in vertical integration occurred within most industries in the last decades. In the past, most of the studies investigating their relative performance have documented a profitability and productivity gap in which suppliers were disadvantaged relative to other producers (final firms). However, the recent globalization of intermediate goods markets has had important repercussions on suppliers of mature industrial countries like Italy, compelled to face low-cost competitors and to develop the technical and relational capabilities needed to connect themselves with the large buyers and assemblers operating in Global Value Chains (GVCs). As a result, suppliers which have best managed to adapt to changes may have obtained significant improvements in their performance. This view is supported by the theoretical framework proposed by the Global Value Chain Approach (GVCA) initiated by Gereffi (1994). According to this stream of literature, whether and how supplier firms are inserted into GVCs is crucial in determining their productivity. In particular, GVCs with advanced governance relations (relational GVCs) require suppliers to become directly involved in strategic stages of production: as a consequence of their participation in this type of chains, suppliers receive the incentives and opportunities to raise their productivity to the extent that the gap between them and final firms can be eliminated. To assess the validity of the GVCA predictions, an empirical investigation is carried out in this paper to estimate the Total Factor Productivity (TFP) of an unbalanced panel of 5137 Italian industrial firms for the period 1998-2006. Comparing the TFP of supplier and final firms, in most industries statistically significant differences are found for less capable, non-innovating and non-exporting firms; conversely when the most capable supplier and final firms (innovators and exporters) are considered, no significant differences come out between their average TFP. Very similar results are found when the same investigation is performed on labour productivity. This evidence corroborates the GVCA intuition: the “supplier discount” holds for low-capabilities suppliers involved in captive or modular GVCs (Gereffi and al., 2005). Conversely, when high-capabilities suppliers participate in relational GVCs, their productivity is stimulated up to remove the gap with final firms.