Comparing Outsourcing Patterns in Domestic and FDI Manufacturing Plants: Empirical Evidence from Spain

Abstract

To fully understand the local linkages of Foreign Direct Investment (FDI) plants, we argue it would be useful to analyze the outsourcing patterns of such plants in comparison to domestic plants. Consequently, we examined 1031 industrial plants, both domestic and foreign, located in Spain. The FDI plants show patterns similar to those of domestic plants with regard to the level of outsourcing, the incidence of outsourced production on the companies’ total sales and the economic content of outsourcing relationships. Further, our results show that levels of embeddedness in the local and regional economy of FDI plants are not significantly different from domestic plants. However, FDI plants are highly concentrated spatially in the largest industrial agglomerations. For such plants, Barcelona not only seems a preferred site for location but also for contracting manufacturing tasks.

Acknowledgements

The authors gratefully acknowledge the financial support provided by Fundación BBVA for conducting field research and from the Spanish Ministerio de Ciencia e Innovación, project [ECO2010-17485], for additional funding.

Notes

For Spain, Pelegrín and Bolancé (2008) find that agglomeration economies are determinant location factors for affiliates which operate in high-tech industries, though not for those which operate in low-tech industries, which are more attracted by resource availability.

Includes wood, pulp, paper and printing; food, beverages and tobacco; and textiles, leather and footwear.

Includes building and repairing of ships; rubber and plastics; coke and refined petroleum; other non-metallic mineral products; basic metals and fabricated metal products.

Includes electrical machinery; motor vehicles; chemicals (excluding pharmaceuticals); railroad equipment; and machinery and equipment.

Includes aircraft and spacecraft; pharmaceuticals; office and computing machines; radio, TV and communications equipment; medical, precision and optical instruments.  While the OECD classification has four categories, here the medium-high and high R&D intensity classes were collapsed to avoid thin cells in cross-tabulations.

Differences between FDI plants and domestic plants are statistically significant among firms which operate in medium- and high-tech industries (significant at 1%) but not among plants which operate in low-tech industries.  While some FDI plants’ networks are, in part, global, others are highly localized.

Note, in these estimations, we have dropped the percentage of exports in total sales. This variable was never significant but there were some signs of multicolinearity, especially with the firm size variable.

In the literature on foreign affiliates, embeddedness issues are related to two main factors: host country sourcing and use of local networks (McDonnald et al., 2005).  Other authors also consider local R&D activities, skills and training and repeated investment (Perkmann, 2006; Phelps et al., 2003). As stated, here we focus on production outsourcing networks.