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Offshoring as a survival strategy: evidence from manufacturing firms in Belgium

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Abstract

This paper analyzes the impact of globalization on the exit behavior of manufacturing firms in Belgium. Imports from low-wage countries are found to exert a strong competitive effect, which raises the likelihood of exit of firms in industries where intra-industry trade is relatively low. Similar to import competition, growing penetration by multinational firms in the industry has an equally strong competitive impact on the likelihood of exit of domestic firms. However, Belgian firms that offshore activities to non-European Union countries are able to substantially improve their chances of survival. This also holds for subsidiaries of multinational enterprises operating in Belgium. Unlike domestic firms, the likelihood of exit of subsidiaries of multinational enterprises is found to be less sensitive to domestic market conditions in the host country.

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Notes

  1. For most of the European countries the decrease in manufacturing employment was only one third over the same period.

  2. To be on the safe side in computing life spans, we performed additional controls before classifying the absence of report as a firm exit. We required that a firm be absent from the file for at least 2 years in order to be classified as an exit. For this reason, in our subsequent analysis we used data only until 2001, although our data files go up to the year 2002.

  3. We were constrained to use the discrete logit model-to-model exit, rather than use a continuous year-to-year hazard (survival) model. The available data cover a period of only 6 years, starting from 1996, which obviously does not correspond to the year in which each firm first entered its industry. A life table that would reflect the distribution of survival times over our sample period is rather limited, and would contain many censored observations. Using year-to-year fluctuation in exit rates would be likely to increase measurement error in the dependent variable. And some independent variables would show insufficient variation over the short time period of our data, or have a delayed impact on the exit decision, which would then require the inclusion of various adjustment lags (Alvarez & Görg, 2005).

  4. We are grateful to a referee for suggesting to split up the sourcing variable following the region of origin.

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Acknowledgements

The paper benefited from helpful comments made by R. Belderbos, H. P. Bowen, E. Pennings, the JIBS Departmental Editor Professor Bruce Blonigen, and two anonymous reviewers.

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Correspondence to Leo Sleuwaegen.

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Accepted by Bruce Blonigen, Departmental Editor, 15 June 2007. This paper has been with the authors for three revisions.

Appendices

APPENDIX A

Measurement of TFP

To analyze firm productivity, TFP is calculated following the methodology developed by Caves et al. (1982) and used in Aw et al. (2003). The methodology consists in constructing an index of productivity, whereby for each firm i the logarithm of the levels of output Y and inputs X are compared with those of a hypothetical firm, the reference point, whose output and input values take the arithmetic mean values of log output and log input. α ij corresponds to the share of input j in the total input costs of firm i, and is the corresponding input cost share of the representative firm, averaged over all firms in the industry in a specific year. Hence a non-parametrically calculated TFP index is obtained for each firm, which represents the relative productivity of the firm in its industry:

with j=[1, n] for the n inputs: capital, labor, energy, materials, and purchased business services.

APPENDIX B

Measurement of Intra-Industry Trade (IIT)

The Grubel–Lloyd index IIT measures the share of imports or exports (whichever is smaller) that is “covered” by exports and imports of similar types of goods. The index ranges from 0 to 1, where an index of 1 reflects 100% intra-industry trade. The Grubel–Lloyd index at a NACE-3 digit industry level (Marvel & Ray, 1987) is defined as follows:

where X i is total exports in industry i and M i is total imports in industry i averaged over the 3 years preceding the exit interval. The measure also picks up two-way intra-firm trade following international sourcing, if the trade covers goods in the same industry, but less so if the sourcing covers the exchange of goods in vertically distinguished industries.

APPENDIX C

Correlation Matrices

See Table C1, Table C2 and Table C3.

Table a1 Correlations of firm variables for domestic firms
Table a2 Correlation of firm variables for MNE subsidiaries
Table a3 Correlations of industry variables

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Coucke, K., Sleuwaegen, L. Offshoring as a survival strategy: evidence from manufacturing firms in Belgium. J Int Bus Stud 39, 1261–1277 (2008). https://doi.org/10.1057/palgrave.jibs.8400403

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