DP2395 The Decision To Invest In A Low-Wage Country: Evidence From Italian Textiles And Clothing Multinationals

Author(s): Giorgio Barba Navaretti, Anna M Falzoni, Alessandro Antonio Turrini
Publication Date: March 2000
Keyword(s): Foreign Direct Investments, Product Differentiation, Production Relocation
JEL(s): F23, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2395

In this paper we investigate the firm-specific factors that account for the decision to invest in low-wage countries on the part of Italian firms in the textiles and clothing sector. This analysis is motivated by the fact that our survey data show, between 1990 and 1997, a decline of average employment in parent companies, while that in subsidiaries grew substantially. However, correlation and regression analysis show that only employment in parent companies that invested only in low wage countries seem to be negatively related with employment abroad. Our hypothesis is that investments in cheap labour countries are mainly cost-driven, and undertaken by firms that focus on a low-quality, low-cost strategy. We test this hypothesis through a probit analysis. The evidence suggests that investments in cheap labour countries are more likely to be of a vertical type, being relatively more labour-intensive compared with the parent company. Our hypothesis seems to be confirmed empirically. Investments in low-wage countries are more likely to generate abundant intra-firm trade and to be undertaken by firms with low shares of skilled employment.