**A. Appendix**

*Outsourcing and Offshoring*

**5. Conclusions**

as firms that serve only domestic consumers.

disrupt in-house learning processes [49–53].

volume of FDI. In particular, they show that the larger the institutional distance, the larger the adaptation costs multinational have to overcome in order to access foreign markets. In turn, large adaptation costs due to institutional gap reduce both the number of firms able to undertake FDI and the profitability of FDI themselves. Indeed, the inefficiency in FDI and offshoring in the South evidenced in our work may be due to additional operational costs related to extended supply chains. While some costs are expected, such as those of carrying higher inventories due to longer delivery chain, higher costs of inventory obsolescence, higher insurance costs, higher management operational requirements, there are many additional costs that are unexpected and labelled "hidden costs of offshoring" recently investigated by the international business literature [45]. There can also be higher local legal and administrative burdens, country trade disputes resulting in punitive fines and instances of intellectual property theft. It is also felt that more successful products can be better designed and improved by having the relevant functions (design, research and development, production, and sales) close to each other.

Based on simple regression tests and using a panel data set of about 7300 Italian manufacturing firms, we have explored in this work to what extent the ordering of the productivity distributions of firms differently engaged in overseas markets conforms to the predictions of the literature. We categorized our firms into four groups according to whether they perform FDI of horizontal type, offshoring activities motivated by comparative advantages of the host country, purely exporters as well

Our results suggest that exporters outperform firms serving only the domestic market and outperforms also firms engaging in H-FDI in terms of productivity. Even when we include offshoring firms the productivity of this type of firms is not higher than exporting firms. Hence, our simple analysis shows that firms that perform FDI, either horizontal or vertical do not show higher productivities. The possible explanation of no difference in productivity between these two forms of foreign investments is that they are strictly interrelated and firms engaged in both activities perform equally in terms of productivity. Another reason is that increasing productivity from FDI and offshoring is not a short run phenomenon but it takes time to be conducive to high productivity (see [46]) On the contrary, exporting firms are exposed to new knowledge, technology and greater competitiveness in the global market and take advantage from this exposure through substantial learning processes that may improve their performances. The learning effect of exporting, as the literature shows, does not require a long time spin. On this ground, there is a large body of empirical evidence - known as "the microeconomics of international firm activity [16, 47, 48] that shows a positive correlation between firm productivity and export propensity just after two or three years. This evidence follows key theoretical contributions that points to the existence of large fixed cost of horizontal FDI and offshoring. To these contributions adds the ones that comes from the recent literature on the hidden costs of offshoring. Many offshored activities are strictly linked with domestic processes, which require complex coordination costs and unanticipated organizational need as well as other hidden costs that can

More work is necessary to demonstrate how these costs arise and quantify their impact especially when the distance between countries and fragmentation of various stages of production in different countries are taken into account. Indeed, when we differentiate our firms by geographical location of FDI and export destinations

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## **A.1 Description of variables**

The source of our data set are the 9th and 10th waves of Capitalia surveys covering the periods 2001-2003 and 2004-2006. The survey sample contains all Italian manufacturing firms with more than 500 employees and small and medium sized firms are selected through a stratified sample. In addition to the detailed qualitative information, the sample is complemented by annual balance sheets data for all the firms included in the sample.

Below is the description of the variables used in the analysis

K = fixed capital stock at the end of the period as the accounting value of net immobilization as reported in the balance sheet.

VA = the balance sheet value added of firm deflated with the corresponding producer price index.

L = total employment has been split between white and blue collars. The number of white collars is obtained by the difference between total employment and the number of hand workers.
