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Outsourcing Decisions, Product Innovation and the Spatial Dimension: Evidence from the Spanish Footwear Industry Jose A. Belso-Martinez Urban Stud 2010 47: 3057 originally published online 25 May 2010 DOI: 10.1177/0042098009359952 The online version of this article can be found at: http://usj.sagepub.com/content/47/14/3057
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47(14) 3057–3077, December 2010
Outsourcing Decisions, Product Innovation and the Spatial Dimension: Evidence from the Spanish Footwear Industry Jose A. Belso-Martinez [Paper first received, July 2008; in final form, September 2009]
Abstract Recent studies in developed countries frequently emphasise the importance of outsourcing as a strategy for manufacturing industries to survive. However, there is little qualitative evidence that specifically describes outsourcers in mature industries with competitive problems, particularly in southern Europe. This paper attempts to fill this gap by investigating the distinctive traits of firms located in the most important Spanish footwear industrial districts. From a sample of 401 Spanish firms surveyed in January and February 2006, it was found that size, design and product innovation, prior institutional networks and location in specific industrial districts favour the development of outsourcing strategies. By contrast, clients’ prior networks are negatively related with contracting-out productive activities. These results are relevant in several dimensions. However, the positive impact of some districts in the externalisation decision should be specifically mentioned. Such evidence seems to: confirm the consistency of the competition–co-operation dynamics in some geographical areas and the decline of others; and point out the existence of divergences in the outsourcing strategies at district level due to product and market characteristics.
1. Introduction In the today’s context of globalisation and intense competition, outsourcing appears to be a widespread tool applied by companies to try to find ways to remain competitive. This strategy provides advantages for outsourcers such as increasing flexibility, decreasing cost structure or access to advanced technology. Multiple aspects of the trend to externalise have been examined in the academic arena. For example, Grossman and Helpman (2002 and 2005)
analysed theoretically a firm’s decision whether to produce in house or to outsource. Traderelated aspects attracted the interest of Jones and Kierzkowski (2001). However, only recent studies tackle the different factors that affect firms’ outsourcing decisions. The manufacture of footwear proceeds in a series of stages (design, cutting, pre-sewing, sewing, pre-assembly, assembly and final treatment) and is highly labour intensive. The nature of this production process gives ample scope for variety in its organisation
Jose A. Belso-Martinez is in Departamento de Estudios Econo´micos y Financieros, Universidad Miguel Herna´ndez, Avenidad de la Universidad s/n, Elche, Alicante, 03202, Spain. E-mail:
[email protected]. 0042-0980 Print/1360-063X Online Ó 2010 Urban Studies Journal Limited DOI: 10.1177/0042098009359952
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and division of labour. Among the potential strategies, the externalisation of specific phases of the production cycle or certain components has become one of the most frequent policies among shoemakers. Given the relevance of outsourcing in this industry, researchers have been aware of this reality (Ghani and Rana, 2005; Schmitz, 2006; Amighini and Rabellotti, 2006; among others). Even though Spain has always been in the ranks of the world’s largest shoe-producing countries, a cursory review of the most relevant figures indicates that the Spanish footwear industry is dealing with difficulties and a period of change. According to the latest data available, the Directorio Central de Empresas has 4520 establishments classified as footwear manufacturers in 2006, down from 5054 registered in 2000 (a 10.6 per cent reduction).1 Latest international trade figures published by the Federacio´n de Industrias del Calzado Espan˜ol (FICE) also show a negative trend over the same period.2 Total exports decreased by 49.7 per cent in terms of pairs and the covering rate of exports on imports reached its lowest level dropping from 296 per cent to only 105 per cent. From a sectoral perspective, the incidence of outsourcing is considerable. Using data obtained from the Encuesta sobre Estrategias Empresariales (a panel survey which provides information at the firm level for the period 1990–2002), we observe that the number of footwear companies engaged in sub-contracting arrangements amounts to slightly over 40 per cent. Some relevant details should be specifically mentioned: most of the arrangements have traditionally taken place within the region; the incidence of material sub-contracting is highly frequent among local firms, around 20– 25 per cent; and international operations in low-cost countries are of growing importance. Taking into account the relevance of the footwear industry, the difficulties generated by low-cost producers and the reduction in
quantitative research focused on certain aspects of the outsourcing phenomenon in the Mediterranean countries, throughout this article we shed some light on the particular profile of firms that decide to outsource. Using data from a specific survey conducted on 401 footwear companies, the firm-level characteristics of outsourcing companies are determined. This allows us to explore questions that have received little attention from researchers. In particular, we focus on examining how footwear firms’ decisions to outsource are associated with size, internationalisation, value added activities, prior networks and the spatial dimension. The spatial dimension is tackled by evaluating the influence of the characteristics of each district in a firm’s outsourcing decision. In order to achieve our objective, we have structured this paper as follows. After the introduction, the second section presents literature on industrial districts, specific factors that may influence the outsourcing decision and a description of the Spanish footwear industry. The third section consists of the development and implementation of a survey directed at a representative sample of footwear firms located in four Spanish industrial districts. In the fourth section, we present the results obtained. Finally, in the fifth section, we show the main conclusions, suggest implications for policy-makers or entrepreneurs (managers) and outline some future research lines derived from these results.
2. Literature 2.1 The Industrial District Model
Since the 1970s, academics have persistently researched the Marshallian notion of industrial districts. The original conceptualisation of industrial districts was essentially characterised by some time-dependent social and economic endogenous forces of growth where a particular atmosphere is recognised as the
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main productive force (Belussi and Caldari, 2009). Although many authors have attempted to update this original concept (Pyke and Sengenberger, 1992; Becattini, 2004; Spaventa and Monni, 2007; Belussi, 2004; Bellandi, 2007; among others), a certain consensus exists about the key elements building the competitive advantage of this industrial organisation model: a large number of small and medium enterprises (SMEs) concentrated in a specific area; the deep specialisation by the local firms; the decomposition of the production process in different phases; the presence of external economies to the individual firms, but internal for the territory; the development of sub-contracting and co-operative behaviours; and the development of productive and organisational know-how, periodically regenerated by processes of knowledge exchange between the social network actors (Schiavone, 2005). The economic action that links together the actors operating in this ‘Marshallian’ atmosphere, appears to be socially embedded (Becattini, 2004; Parrilli, 2008). The spatial proximity and the active role of local institutions (di Giacinto and Nuzzo, 2004; MolinaMorales, 2005 and 2008; Provasi, 2002), promote close contact between local system actors. Repeated interaction shapes actors’ mutual expectations towards trustful behaviour and a common culture that improve the quality and result of the interaction (McEvily and Zaheer, 2006). Embeddedness favours collective learning processes that result in superior specialisation and co-ordination between district actors, generating higher productivity and competitiveness (Bellandi, 2005; De Propris, 2008; Parrilli and Sacchetti, 2008). However, these dense local linkages also can lead to ‘cognitive’ lock-in (Hassink, 2007; Belussi et al., 2008; Schamp, 2005; Alberti, 2006). Relations with agents located outside the industrial district boundaries constitute important mechanisms to
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access new knowledge and avoid ‘cognitive’ lock-in (Giuliani et al., 2005). Among the endogenous and exogenous factors that may truncate the evolution of the industrial district model, the relevance of the globalisation process is widely recognised (Sturgeon et al., 2008; Gereffi et al., 2005). Intense economic globalisation can breed increased competition and disembedding of the local system (Camuffo, 2003; Nassimbeni, 2003; Samarra and Belussi, 2006). Disembeddedness refers to transition from reasoning based on social relationships to more commercially oriented reasoning, and change towards increased competition that gradually wipes out former ties and leads to a minor anchorage to the local environment (Barabel et al., 2007). In such a context, in order to keep their social identity, industrial districts should try to develop new competences by absorbing knowledge and technologies generated elsewhere (Belussi et al., 2008). 2.2 The Outsourcing Phenomenon
Academic literature has discussed the outsourcing concept attending to many different aspects (see Espino and Padro´n, 2006, for a recent review). Through the present work, we may consider outsourcing as the externalisation of activities or business processes that used to be conducted in-house with the aim of achieving objectives such as improving competitive advantage or obtaining better economic performance. Our definition has two important characteristics. First, it implies that, if the activity was never carried out within the boundaries of the firm, the term outsourcing should not be used (Dragonetti et al., 2003). Secondly, outsourcing can be a strategic decision focused on the maintenance of competitive advantage or a tactical and operational decision aimed at the pursuit of a better economic performance.
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Outsourcing and prior networks. Even though productive externalisation is a key characteristic of industrial districts, their effect on the outsourcing behaviour of manufacturing industries has received little attention. Recent studies by Taymaz and Kilicxaslan (2005), Holl (2008), Holl and Rama (2007) and Artı´s et al. (2008) can be considered remarkable exceptions. Mutual trust existent in ‘Marshallian’ atmospheres may favour interorganisational relations. As a consequence, district firms become open structures permeable to other organisations and market mechanisms (Jacobides and Billinger, 206). Firm’s ‘relational capabilities’ (Dyer and Singh, 2004) or ‘relational assets’ (Dunning, 2002) are key elements for understanding both the sources and dynamics of interfirm networks. Prior interorganisational linkages offer learning opportunities for firms to develop this type of capability (Kale and Singh, 2007). Through past experiences, firms accumulate knowledge about how to build effectively and manage subsequent relationships (Heimeriks et al., 2004; Capaldo, 2004). Outsourcing, like other co-operative relationships, is also subject to incremental learning (Graf and Mudambi, 2005; Maskell et al., 2005). For example, selecting the appropriate supplier or concluding the collaboration is easier when protagonists have accumulated knowledge about outsourcing. Empirical studies endorse the positive impact of prior networking experience in the development of new co-operative relationships (Lo´pez and Rosell, 2004; Wang and Nicholas, 2007; Arin˜o et al., 2007). Research conducted by Gulati (1999) specifically reports that, the greater a firm’s relational experience and capability, the more likely it is that it will form a new partnership. Along the same lines, Leiblein and Miller (2003) found that organisations with significant levels of outsourcing experience achieve a higher probability of externalising production. More
recently, Holl and Rama (2007) confirmed the importance of prior experience in co-operation and trust between partners for the establishment of non-local linkages. Outsourcing and value added activities. Conventionally, the development of value added activities discourages interfirm linkages as innovators attempt to protect specific know-how and intellectual property rights (Tecee, 1986). Considering the transaction cost economics approach (TCE) (for example, Grossman and Helpman, 2002 and 2005) and property rights theories (for example, Antras and Helpman, 2004), transactions involving conditions of uncertainty and specific assets, which spur rent-seeking behaviours by opportunistic agents, would be better managed within the firm boundaries (Ghani and Rana, 2005). For example, innovation-intensive industries tend to be vertically integrated because innovation will be hard to achieve with outsourcing, as suppliers tend to develop products that they can use for multiple customers (Mol, 2005). From a different perspective, the resourcebased view (RBW) argues that firms achieve sustained competitive advantages implementing strategies that exploit their internal strengths (Barney, 1999). Such specific internal attributes should be capable of making a difference to the organisation in the sense that they add value and are not easily obtained by competitors. Managers should then concentrate their efforts in these core competencies while externalising or postponing investments in the non-core ones (Espino and Padro´n, 2006). The use of collaborative alliances allows SMEs to save and redirect their scarce resources (Lazerson and Lorenzoni, 1999). The capacity of SMEs to perform high value added activities is therefore linked to their integration in networks (Feldman et al., 2005). Industrial districts exhibit the trustful and co-operative environment in
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which social relations produce resource sharing and knowledge spill-overs, the essential elements underpinning sustainable innovation economies (Cooke, 2005). However, local networks may not always be constructive (Christopherson and Clark, 2007). The innovative capacity of the industrial district model can be limited by: the local firms’ characteristics and their interactions with each another (Audretsch, 2004); and, the changing agenda of lead firms in global production networks (Benneworth, 2006; Rutherford and Holmes, 2007). Multiple empirical studies support the positive relationship between outsourcing and the implementation of high value added activities (Lieb and Miller, 2002; Hong et al., 2004; Ono and Stango, 2005; Tan et al., 2006; Mazzanti et al., 2006). In the Spanish or Italian footwear industry, activities with a high labour content and low value added are frequently candidates to be produced outside firm boundaries, while essential business operations such as design and product development tend to be kept in-house (Rabellotti, 2004; Amighini and Rabellotti, 2006; Tortajada et al., 2005; Belso-Martı´nez, 2008a). Outsourcing and internationalisation. Firms gradually learn and accumulate knowledge about international business as a result of developing foreign operations (Camuffo et al., 2006). In mere marked-based global relationships, there is little interaction in terms of exchanging information and collective learning. Conversely, in tighter structures—such as modular networks, captive networks or hierarchy—intensive interaction between firms exists (Gereffi et al., 2005; Schmitz, 2006; Sturgeon et al., 2008). These tighter external relationships may constitute a key element of the knowledge accumulation process and become the engine that fuels the internationalisation process (Johanson and Vahlne, 2003). Outsourcing is also a strategy that is subject to incremental learning, in which near-
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shore locations precede far-shore locations (Graf and Mudambi, 2005; Maskell et al., 2005). In the global arena, a long-standing experience facilitates partner search and selection, contracting, process management and risk management (Camuffo et al., 2006). Consequently, international knowledge makes the implementation of foreign outsourcing more viable. Studies by Mol et al. (2004) and Berry and Brock (2004) confirm the positive correlation between internationalisation intensity and experience and the propensity for non-local sourcing. Cross-border linkages are important for allowing outsourcers to benefit from access to external resources and build new capabilities (Schmitz, 2006). However, the expected profits decline considerably if the costs of finding the appropriate partner are excessive (Grossman and Helpman, 2005). Market thickness, a notion linked to the number of firms and the degree of internationalisation of each industry, reduces the search costs as the chances of finding suitable suppliers at moderate cost increase. If a large number of actors exists on each side of the market, the probability and the quality of a match are higher (Dı´az and Triguero, 2007; Hubbard, 2001; Ono, 2007). From a different perspective, Mitra and Ranjan (2008) stress how a large pool of buyers and suppliers may also act as a disciplining device and favour successful outsourcing relationships. Several empirical studies support the positive impact of market thickness and openness to international trade in the ‘make or buy’ decision (Jabbour, 2008). Paying special attention to internationalisation and foreign trade, Kimura (2001) and Go¨rg and Hanley (2004) introduced in their models the export intensity, obtaining a significant and positive relationship with the development of outsourcing strategies. For the Spanish case, Dı´az and Triguero (2007) show that several independent variables such as former subcontracting decisions, product differentiation,
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industry size and exporter status, affect positively the current sub-contracting decisions. In consequence, as foreign operations increase the number of actors, we can expect that outsourcing will be more feasible in firms operating in the international sphere. Outsourcing and firm size. There is a general consensus about the existence of a relationship between the degree of outsourcing and the size of the firm. On the basis of the economies of scale arguments, SMEs have more difficulties in achieving the minimum efficient scales in the production of intermediate inputs, as a consequence these firms should exhibit higher propensity to engage in outsourcing operations (Abraham and Taylor, 1996). Conversely, since outsourcing increases a firm’s capacity for adaptation and flexibility, larger firms are more likely to carry out the vertical deintegration of their production activities. The outsourcer intends to benefit from the experience the supplier has, as it develops the particular process more widely and with better resources. Tomiura (2005) also suggests that smaller firms could face higher search costs both in finding contracting partners or new locations, so a positive relationship between firm size and outsourcing would then be expected. Many other authors have also empirically contrasted this positive relationship between firm size and outsourcing (Kimura, 2001; Holl, 2008; Tomiura, 2005 and 2006; Ono, 2007). 2.3 The Spanish Footwear Industry: Evolution and Structure
During recent decades, the productive structures and the geographical distribution of the Spanish footwear industry have undergone important transformations. The vertically integrated companies have disappeared as a result of the fragmentation of the production process and the emergence of the informal economy (Contreras and Toma´s, 1998;
Figure 1. Location of footwear manufacturing provinces in Spain.
Ybarra, 2000). Networks of specialised small firms, based on informal but stable relationships, have arisen to face challenges such as reduced lots, more sophisticated customers and fashion demands (Banyuls et al., 1999). Consequently, Spanish footwear production is nowadays a domain of small and micro enterprises. In 2006, only 3.33 per cent of the companies employed more than 50 people, while 52.95 per cent employed fewer than 10. The average size of the firms was 14.7 workers (FICE, 2007). The distribution pattern of production activities shows the specific weight of the region of Valencia (Alicante), accounting for 62.92 per cent of the industry. Castilla– La Mancha (Albacete and Toledo) occupies second place in the ranking with 12.06 per cent of the shoes manufactured. Other important production areas are La Rioja and the Balearic Islands, 9.16 per cent and 5.48 per cent respectively. Figure 1 illustrates the geographical location of footwear production.3 Deeper analysis of this spatial organisation reveals that, inside those regions, the production is extremely concentrated in small areas or even specific municipalities. In previous literature, these geographical agglomerations of firms have been frequently considered as industrial districts (Giner and Santa Marı´a, 2002; Boix and Galletto, 2006;
OUTSOURCING DECISIONS
Table 1.
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The principal footwear industrial districts
District
Province
Product specialisation
Export orientation Segment of market
Almans Elchea Elda-Petrera Villenaa Inca–Menorca Arnedo–Calahorra
Albacete Alicante Alicante Alicante Balearic Is La Rioja
Men’s shoes Mixed Women’s shoes Children and orthopaedic Women’s and men’s shoes Mixed and security shoes
Medium–high High High High Medium–high Low to medium
Medium to high Medium Medium to high Medium to high High and top Low to high
a
These three districts are sometimes considered only under the name of Vinalopo´ district. Sources: Tortajada et al.(2005); Ybarra and Santa Marı´a (2006), among others.
Climent and Me´ndez, 2002; Ybarra, 1991; Soler, 2000; Herna´ndez and Soler, 2008). Table 1 summarises the main traits of the principal footwear districts. During 1960–75, the leading districts experienced an intense growth. These processes of industrial development were endogenous to each territory and sustained by local capital, entrepreneurs and a pool of skilled workers. Imported machinery eradicated craft activities, facilitating high production for global buyers. The economic crisis and the emergence of new foreign competitors in the period 1975–95, severely transformed the sector. The informal economy, vertical disintegration and flexible specialisation turned into dominant trends in the reorganisation of production. Some footwear manufacturers started to develop non-manufacturing business functions. From 1995, the economic context has been characterised by the integration of Spain into the European Union and the intensification of global competition. The auxiliary industry, information technologies, local sub-contracting and delocalisation have become the main tools for developing high value added activities and successful competition (Ybarra and Santa Marı´a, 2006). Table 2 reveals the most recent trends in the footwear industry. Spin-off processes by skilled employees have produced a solid and innovative auxiliary industry, crucial for the formation of disintegrated business models and value added
activities (Tortajada et al., 2005). Previously acquired personal relations and knowledge have been the main competitive force of these new companies (Ybarra, 2006). However, the construction of these business structures would not be viable without the reinforcement of the existing shared values and the trusting atmosphere provided by local institutions such as manufacturers’ associations and technological institutes (Toma´s et al., 2000; Molina-Morales, 2008). Due to globalisation pressures, both district firms and local institutions have established linkages with external actors in order to access new knowledge. Consistently, internationalisation of production has turned into a frequent strategy. Labour-intensive productive activities or the entire production cycle are relocated to low-cost geographical areas, mainly using lighter internationalisation strategies (BelsoMartı´nez, 2008a; Ybarra and Santa Marı´a, 2006).
3. Research Methodology Applying the arguments discussed in previous sections of the paper, the aim of our empirical research is to check the influence of different factors on the outsourcing decision. Through the next sub-sections, every aspect of the empirical analysis is discussed in detail: elaboration of the questionnaire, data and sample issues, measures applied and statistical analysis.
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Table 2.
Recent trends in the Spanish footwear industry
Production Pairs (millions) Value (million euro) Exports Pairs (millions) Value (million euro) Imports Pairs (millions) Value (million euro) Trade balance Pairs (millions) Value (million euro) Coverage ratio (percentage) Firm size Average value (employees)
2000
2001
2002
2003
2004
2005
2006
202.6 3033.3
209.3 3157.6
197.9 3120.4
171.0 2740.3
147.4 2435.4
126.3 2151.4
118.3 2059.0
141.7 1960.9
141.7 2102.9
136.8 2118.6
126.8 1919.9
108.5 1754.2
96.4 1647.3
94.6 1718.3
80.1 669.9
83.0 739.0
104.2 829.7
131.2 1008.9
189.5 1145.6
247.3 1386.8
295.7 1637.3
61.6 1291.0 293
58.7 1363.8 285
32.6 1288.9 255
-4.4 911.0 190
-81.0 608.6 153
-150.9 260.5 119
-201.1 81.0 105
16.83
17.43
16.43
19.44
15.78
15.35
14.68
Source: FICE (2007).
3.1 The Questionnaire
Fieldwork was carried out in the four leading footwear districts: Vinalopo´, Arnedo-Calahorra, Almansa–Albacete and the Balearic Islands. In a preliminary stage, a combination of semistructured questionnaires and face-to-face interviews was applied selectively to gather primary data about multiple aspects of the footwear industry. At this exploratory stage, outsourcing behaviour was tackled in the context of the overall organisation of the Spanish footwear sector. A representative sample of 15 local footwear manufacturers, researchers and institutions was selected on the basis of reputation, involvement and geographical location. The selection of a semi-structured versus a structured questionnaire was made due to the exploratory nature of this initial phase of our research (Strauss and Corbin, 1994). The information obtained at this preliminary stage was used later for the construction of the questionnaire survey and the discussion of the statistical results. In order to understand firm-specific determinants of outsourcing, a four-page closed
questionnaire was designed based on inputs from the exploratory analysis and our literature review. After this design phase, a pilot questionnaire sent to 35 firms provided us with the opportunity to modify some categories and questions with the intention of getting better and unbiased responses. Once modifications were included, our questionnaire was ready to be submitted to all companies in the sample frame. The questionnaire consisted of several parts and measured a number of different variables about firm-level characteristics, strategy, outsourcing relationships and networking. Only some parts of the questionnaire are used in the present study: information about firms’ general characteristics, international activities, investment in high value added activities, market segment and information about networking with suppliers, customers, institutions and competitors. 3.2 Data and Sample Issues
The target population for the sampling was drawn from DIRCE and included footwear manufacturers in the four leading industrial
OUTSOURCING DECISIONS
districts. As this public statistical source does not give detailed information at the firm level, Dun&Bradstreet was used to select randomly firms with more than one employee. In order to achieve a critical mass of firms per district and to take into account firms of different sizes, the sample was stratified by size and geographical areas. The questionnaire was submitted to entrepreneurs or top managers in the survey frame during the period January to February 2006. After careful revision, 401 valid responses were obtained, permitting a significance level of 95.5 per cent with an error margin of 5 per cent in the worst case (p 5 q 5 50). The sample obtained was geographically representative. Almost 63 per cent of the establishments in the sample were located in the Vinalopo´ district, with available information from DIRCE showing a similar percentage in that area. The other districts were consciously overweighed to allow us to use various statistical methods to analyse potential differences among the four industrial districts. Each one of the smaller agglomerations had slightly over 12 per cent of establishments. Firm size was measured by the average number of employees. The dataset reveals that 53.3 per cent have 1–5 employees and an additional 20 per cent and 15 per cent have 6–10 and 15–24 employees respectively. Only 11.7 per cent of the firms have 25 or more employees. The variable capital stock distribution reveals a similar trend, with more than 82 per cent of the firms in the 0–18 000 euro interval. Thus, the structure of the industry and the sample for this research are heavily tilted towards the smallest size categories. Around 20 per cent of the companies had decided to externalise at least one activity during the past five years.4 In line with Tortajada et al. (2005), surveyed firms signalled cost reduction, flexibility and specialisation as the main reasons leading to the outsourcing decision. Externalisation was essentially focused in labour-intensive
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activities such as intermediate phases (cutting and stitching) and final phases (assembling). Of the surveyed companies, 78.8 per cent outsourced the first group of activities, while 51.5 per cent of the firms externalised the final phases of the productive process. Eighty per cent of the outsourcers developed these operations within the district boundaries, 20 per cent in other Spanish industrial districts and 35 per cent internationally.5 Firms were also classified as exporters and non-exporters on the basis of having ever or never exported. The second group of firms was somewhat larger than those classified as exporters, 60.1 per cent and 40.9 per cent respectively. The sample frame design process, previously specified, in certain measure contributes to enlarge the exporters’ group. Mean export intensity (ratio of exports to total sales) is 17.47 per cent with a 30.22 standard deviation. To detect possible bias, early and late respondent questionnaires were compared in order to observe significant differences. Our analysis revealed no significant divergences in terms of variables or location. We also checked the potential existence of nonresponse bias. Our study showed that significant differences did not exist regarding size or geographical distribution. 3.3 Measures
In line with the conceptualisation presented, managers were explicitly questioned if any productive activity, traditionally conducted in-house, had been contracted to one or various external suppliers in the past five years. Using this conceptualisation, a dummy variable was created in order to discriminate those companies that decided to engage in outsourcing from the rest (1 if the firm developed outsourcing strategies and 0 if the firm did not outsource). After reviewing the theoretical and empirical literature, a wide range of variables (mainly
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JOSE A. BELSO-MARTINEZ
Table 3.
Overview of the explanatory variables: definition, measure and expected sign
Variable Firm characteristics Firm size Capital stock Export intensity Associations Trade shows Product innovation intensity R&D intensity Marketing intensity Networks Clients’ networks Suppliers’ networks Competitors’ networks Institutional networks Spatial dimension IDVI IDAC IDAA IDIB
Description and measure
Expected sign
Average number of employees during the past three years Capital stock invested in the firm (in euros) Export sales normalised by total sales (percentage) Number of institutions, business associations or professional associations the firm belongs to Number of trade shows attended by the firm annually Design and product development expenses normalised by total sales (percentage) R&D expenditures normalised by total sales (percentage) Marketing expenditures normalised by total sales (percentage)
Undetermined Undetermined 1 1
Index built with information about strategic relevance, stability and resources share of these networks (a 5 0.81) Index built with information about strategic relevance, stability and resources share of these networks (a 5 0.70) Index built with information about strategic relevance, stability and resources share of these networks (a 5 0.76) Index built with information about strategic relevance, stability and resources share of these networks (a 5 0.90)
1
Dummy variable that takes value 1 if the firm is located in the Vinalopo´ district and 0 otherwise Dummy variable that takes value 1 if the firm is located in the Arnedo–Calahorra district and 0 otherwise Dummy variable that takes value 1 if the firm is located in the Almansa–Albacete district and 0 otherwise Dummy variable that takes value 1 if the firm is located in the Balearic Islands district and 0 otherwise
1
firm characteristics) were selected to estimate their influence on the outsourcing decision. Table 3 summarises these variables and their expected sign. Regarding network variables, four indexes were drawn up based on Pla and Cobos (2002). Each one of the indexes was constructed with the information collected by asking top managers two questions about: the strategic relevance of the already-established networks when they decided to outsource; and, the intensity of the resources shared and the stability of prior established relationships. The four
1 1 1 1
1 1 1
1 1 1
indexes, named suppliers’ networks, clients’ networks, competitors’ networks and institutions’ networks, achieved a Cronbach’s alpha of over 0.70. Considering the well-known characteristics of industrial districts, discussed extensively in the academic literature, geographical proximity has emerged as a major facilitator of interfirm linkages and outsourcing (Rama et al., 2003; Taymaz and Kilicxaslan, 2005; Holl, 2008). In addition, from a different point of view, studies conducted by Belso-Martı´nez (2008a) and Amighini and Rabellotti (2006)
OUTSOURCING DECISIONS
have explored the existence of considerable disparities among the outsourcing strategies implemented by the Spanish and the Italian footwear districts. In general terms, district characteristics such as traditions, market segment, product characteristics, the specific weight of fashion groups and the availability of resources seem to generate divergences in local firms’ outsourcing strategies. Assuming the importance of location and the potential existence of differences between the Spanish districts analysed, four dummies were included to control for the characteristics of each geographical agglomeration. 3.4 Statistical Analysis
Logistic regression was used to detect the combination of variables that may allow us to predict more accurately whether a firm would decide to become an outsourcer or a non-outsourcer. Table 4 shows coefficients (B) and significance levels for the independent variables included. There is a clear positive relationship between the variables firm size and product innovation intensity and the development of outsourcing operations (p-value and \0.1 and p-value and \0.05 respectively). Institutional networks and associations have the same positive influence on whether a firm becomes an outsourcer or not (p-value and \0.01). Dummy variables corresponding to the Vinalopo´ and Arnedo– Calahorra districts also show a direct impact, p-value and \0.10. Conversely, clients’ networks present a negative relationship with the ‘make or buy’ decision (p-value and \0.05). The logistic regression model predicted 84.4 per cent of the firms correctly. In order to get a more rigorous diagnostic, the Hosmer and Lemeshow test of goodness of fit was performed. The large p-value obtained (p-value over 0.70) indicates a good match. Consequently then, the results reveal a model with considerable predictive power and goodness-of-fit.
Table 4.
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Logistic regression results
Variable
Coefficient
Significance
Constant Institutional networks Clients’ networks Competitors’ networks Suppliers’ networks Capital stock Export intensity Firm size Product innovation intensity R&D intensity Marketing intensity Associations Trade shows IDVI IDAC IDAA IDIB Goodness-of-fit -2 Log likelihood R2 Cox and Snell R2 Negelkerke Model prediction rate (percentage)
24.878 0.631 20.459 20.117
\\\ \\\ \
0.176 0.296 0.072 0.371 0.423 20.10 0.054 0.712 20.150 1.417 0.450 1.564 0.215 159.9113 0.237 0.369 84.4
\ \\
\\\ \ \
\\\
Note: Significance levels: \\\ 0.01; \\0.05; \ 0.1.
4. Discussion First, size may influence the provision mode. Results indicate that larger firms are more involved in outsourcing activities than our small ones. Several empirical studies describe a similar positive relationship between firm size and outsourcing (Holl, 2008; Ono, 2007; Kimura, 2001; Tomiura, 2005 and 2006). In line with Aage and Belussi (2008), qualitative evidence obtained during our exploratory stage suggested why larger footwear firms are more likely to externalise: to attain the organisational flexibility required to manage the low predictability of the fashion market; and to spread the risk involved in innovative activities.
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Co-operative agreements are selected frequently as the model for production and, especially, innovation. A disintegrated interactive chain-linked model, based on knowledge specialisation and exploitationexperimentation processes, gives more possibilities than unilateral options where one actor assumes more responsibility in generating innovations, with the consequence of bearing high risk and investing an important amount of resources (Grandinetti, 2003). Experts interviewed also indicated, endorsing some TCE arguments, the advantages large footwear companies have over smaller companies when deciding to outsource: their greater reputation and stronger bargaining power allow them to find partners more easily; the existence of some fixed costs in the searching process for compatible suppliers. The dynamics of the Spanish footwear industry may also provide some clues about how firm size influences the outsourcing decision. Sales are highly concentrated in fashion chains or strongly positioned manufacturers that have adopted information technologies and organised supply chain relationships (Tortajada et al., 2005; Cervera, 2003). Continuous market changes force leading producers to supplement their structures with an extensive network of shoe and input manufacturers. For example, as signalled by the experts interviewed, the second tier of manufacturing capacity enables larger firms to handle unexpected orders, offer products that require unusual manufacturing capabilities or assume any potential manufacturing demand that cannot be met by the traditional core capacity. Therefore, supporting RBW, larger manufacturers evolve into a sort of brand manager with a considerable amount of non-core functions being outsourced through an extensive network of external collaborators, developed partly thanks to their superior financial and human resources (Ybarra and Santa Marı´a, 2006).
Secondly, the present research reveals that firms with higher investments in product and process innovation are more prone to contract-out production. This finding is consistent with literature approaches conceiving the firm as an open system where firms develop linkages with domestic and foreign independent organisations to access valuable technologies or knowledge (Barney, 1999). By concentrating on product design and outsourcing low-value activities, Spanish manufacturers try to enhance their competitiveness in the global markets (Ybarra and Santa Marı´a, 2006). This strategy has possibly allowed some companies to upgrade their position in the supply chain and maintain a certain amount of local activity (Schmitz, 2006; Sturgeon et al., 2008; Gereffi et al., 2005; Rabellotti, 2004). However, fashion is a volatile market and customers’ demands change constantly. In such a context, research and product planning become extremely difficult, costly and risky. This is why footwear manufacturers opt for collaboration and co-operation, to keep offering innovative fashion products at the right price and at the right time. Taking into account our qualitative results, by following this strategy, footwear manufacturers: release several resources to be applied in more lucrative activities; become highly flexible; access new possibilities in terms of inputs or processes; and, spread the growing risks across a wide range of independent suppliers. The importance of this strategy of product design upgrading and outsourcing of production activities is in contrast with the results obtained for R&D intensity and marketing intensity. The absence of statistical relationships between both variables and the outsourcing decision may be explained by two particular causes. On the one hand, the leading role developed by public and/ or private institutions in the technological innovation area moderates the financial
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resources invested by district firms in R&D activities (Molina-Morales, 2005 and 2008; Belso-Martı´nez, 2008b). On the other hand, the traditional limited investment of footwear companies in branding or R&D activities has already been observed in previous empirical research (Cervera, 2003). For example, Amighini and Rabellotti (2006) point out that the majority of small Italian footwear manufacturers have traditionally been weak in branding, marketing and sales. Considering previous qualitative results (Ybarra and Santa Marı´a, 2006; Ybarra, 2006; Cervera, 2003; Belso-Martı´nez, 2008a), our findings possibly indicate that some Spanish footwear outsourcers aspire to remain competitive by directing efforts to upgrade their position by intensifying their design and product development function and externalising other labour-intensive processes. Like other European countries, they have tried to achieve higher competitive rates by transferring production processes or activities to small specialised enterprises operating within district boundaries or even foreign companies based in regions or countries usually assessed as sources of unlimited cheap wages. As the experts interviewed reported, implementing this strategy, manufacturers have contained prices and released resources that nowadays are essentially devoted to product-development-related activities and investments such as: designers, sophisticated information sources, more prototypes, customised collections, interseasonal collections and fast fashion products. Thirdly, we have explored the influence of on-going collaboration ties and prior networks in the outsourcing decision. On the one hand, concerning institutional networks, local institutions and public organisations seem to favour the development of outsourcing agreements through information flows, financial support, strategy assessment programmes or technical assistance. For
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example, the footwear manufacturers’ association (FICE) leads several programmes focused on the promotion of interfirm cooperation agreements such as the Plan de Cooperacion Empresarial or a comprehensive database of manufacturers interested in establishing long-term business relationships. This result is consistent with their crucial role as promoters of a more trusting atmosphere, importers of external knowledge and supporters of the shared values existing at the local level (Belso-Martı´nez, 2008b; MolinaMorales, 2008; Cervera, 2003; Tortajada et al., 2005). On the other hand, regarding clients’ networks, tight and fluent relations with customers are negatively related to the probability of contracting-out production. In our opinion, this outcome may be justified by two main arguments. First, large fashion chains and the largest footwear buyers have mainly sourced from local sub-contractors. Nowadays, the emergence of foreign low-cost producers has led to intensified cost pressures on local producers, prompting the extensive outsourcing to independent organisations based abroad. In order to improve competitiveness, local producers have often implemented strategies such as quick-response manufacturing that enables organisations quickly to meet the customers’ demands without dropping the quality standards. The successful implementation of these initiatives requires high co-ordination and control of the product development process and the manufacturing cycle. By maintaining the on-going structure and a certain level of vertical integration, footwear manufacturers are more likely to achieve the delivery dates or quality standards. Secondly, many activities had been contracted-out by local manufacturers before the period of study. Therefore, outsourcers had already selected the appropriate business structure to achieve their objectives. Fourthly, pre-published empirical analysis point out that highly internationalised firms
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have more possibilities of becoming main contractors (Kimura, 2001; Go¨rg and Hanley, 2004). The positive relationship between the internationalisation factor and the outsourcing decision has been explained by the existence of a learning effect, the superior probability of contacting suitable providers or the implementation of outsourcing as a strategic instrument to compete with foreign producers (Shy and Stenbacka, 2003; Buehler and Haucap, 2006). However, we cannot confirm that firms with a higher export intensity are more likely to contractout production activities. Our result is consistent with the findings obtained by Dı´az-Mora and Triguero (2007) and can be justified, in line with these authors, due to the relatively low volume of off-shoring operations. Fifthly, Amighini and Rabellotti (2006) argue that differences in international outsourcing strategies undertaken by Italian footwear districts are likely to be related to their market position and to the value chains to which they belong. Similar results have been obtained by Belso-Martı´nez (2008a) in his analysis of the Spanish footwear districts using aggregate data from public sources. In the present research, we found slight evidence of differences in the impact of the spatial dimension on the outsourcing decision. Specifically, variables capturing the structure and particularities of the Vinalopo´ and Arnedo–Calahorra districts influence positively the outsourcing decision; while variables capturing the influence of the other two districts do not achieve statistical significance. Although the statistical significance is moderate, both results seem attractive and demand detailed consideration. Three main points can be noted. First, the robustness of the district roots and the traditional co-operation–competition dynamics seem to survive in the Vinalopo´ district. This geographical area is clearly focused on producing fashion shoes and suffers extraordinary pressure in terms of prices and
margins. In this competitive context, firms usually keep applying externalisation strategies in order to maintain their flexibility to face continuous product changes, meet delivery dates and moderate price growth. The existence of the largest number of potential shoe producers and providers of components or services makes it easier to find the appropriate partner in terms of price, size and even business culture.6 Secondly, the Arnedo–Calahorra district roots also seem to remain healthy. As a considerable number of potential providers are located in this district also, similar reasons may justify the positive relationship between this dummy variable and the outsourcing decision. However, product changes due to fashion and customer demand are not so intense in this area. In consequence, outsourcing is probably linked more to causes such as lowering cost or the requirements of labour resources.7 Thirdly, the other two districts do not achieve the expected statistical significance. Both areas present similar characteristics such as higher prices, the specific weight of men shoe production and high quality standards. Three factors may illustrate their minor predisposition to implement outsourcing strategies either locally or globally: (a) high quality products usually demand superior control over the manufacturing process; (b) men shoes require a small number of designs, product changes or manufacturing process modifications due to fashion demands; and (c) the minor relevance of the auxiliary industry.
5. Conclusions, Limitations and Policy Implications Outsourcing has become one of the main traits of the SMEs behaviour world-wide since the early 1990s. It plays a key role in adaptation to a changing global economy, in which growing competition forces manufacturers
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to look for higher efficiency and flexibility rates. Throughout this paper, we have studied the characteristics of the outsourcing phenomenon in the Spanish footwear industry and have attempted to illustrate some of the topics under scrutiny in this field. More concretely, our research has tried to explain how some firm characteristics and behaviour are relevant to understanding the externalisation decisions. The outsourcing decision has been analysed by means of a database of Spanish footwear manufacturers, covering the most important districts in terms of employment and production. The theoretical framework presented a wide set of potential exploratory variables that we expected to influence the firm’s externalisation behaviour, as in fact the empirical results indicate. Beyond the theoretical discussion, the outcome obtained points out that firm size is positively related to externalisation in the Spanish footwear industry suggesting, for instance, that organisational flexibility or search costs in finding suitable collaborators are important. The contract-out decision is also positively related to the firm’s design and product innovation intensity and to some geographical areas such as Vinalopo´ and Arnedo–Calahorra. The existence of solid institutional networks also affects the establishment of outsourcing relationships. Tight linkages with organisations such as the chamber of commerce, business associations or public organisations favour the establishment of outsourcing operations. This result confirms that local institutions are still crucial for the industrial district. Previous research by Molina-Morales (2005 and 2008) and Belso-Martı´nez (2008b) highlights their positive evolution from just providers of specialised services into strategic partners essential in a global environment. However, clients’ networks are found to be negatively related to the probability of becoming an outsourcer. It seems that strong relations with
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customers may act as inhibitors of deeper outsourcing strategies. Further research is needed on this finding, especially considering issues such as interaction between actors and insertion in global chains. These results are pertinent to debates about the consequences of the competitive pressures from low-labour-cost countries and reveal the particularities of the Spanish footwear districts. In general terms, outsourcers concentrate more financial and human resources in creating quality/fashionable shoes for their potential customers (often fashion chains or brands) and postpone investments in branding or marketing operations. This strategy allows fashion groups, large footwear retailers and wellknown brands (Zara group, Corte Ingles, Cortefiel, Adolfo Dominguez, Purificacion Garcia, among others) to control the commercialisation area and becomes essential for the survival of the local footwear manufacturers. Various similarities with some Italian districts obviously exist. However, Spanish fashion groups are not top brands, like Gucci or Prada. They are focused on the medium and medium-high segments and more concerned about prices. So, local footwear manufacturers are forced quickly to provide very new products at reasonable prices in order to survive. The spatial dimension has also been tackled in the empirical analysis and the discussion. Regarding its influence on the outsourcing decision, findings show dissimilarities among the four districts considered. Even this result demands further research due to the moderate statistical significance; it may indicate a certain decline of the traditional competition–cooperation dynamics in the Balearic Islands and the Albacete–Almansa district and/or the recurrent implementation of vertical integration strategies due to product quality requirements or lack of specialised local providers. So, we should not discard a reduction in the degree of embeddedness in both
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districts, probably caused by globalisation pressures. By contrast, the roots of the Vinalopo and Arnedo–Calahorra districts appear to remain robust. Local firms seem to collaborate with other independent firms in order to achieve superior flexibility, reduce production cost or keep offering innovative products to their customers. Several limitations of our data and analyses should also be noted. Although the research results are also supported by qualitative evidence, some implications should be considered with care due to the moderate level of statistical relevance achieved by certain variables. Our survey did not collect information on all the different footwear industrial districts (smaller ones have been excluded) and did not provide us with exhaustive information about some aspects that directly or indirectly influence the outsourcing decision (for example, how the firms analysed are positioned within broader divisions of labour/supply chains, firms’ profitability or network governance). Such data would have allowed us to enhance the results achieved. It would also be desirable to examine specifically all the range of activities potentially externalised. We have sought to determine the profile of the companies that outsource mostly productive activities. It would be convenient to consider the externalisation of core activities in future research. The collection and analysis of longitudinal data are essential elements for a future research agenda in externalisation and manufacturing industries in developed countries. Our cross-sectional survey has offered a number of insights about the companies that opt for outsourcing strategies, but preclude a more rigorous examination of the prior structure of the outsourcers and the dynamics of their profile. Finally, our results confirm the important role of the institutions in the implementation of collaboration activities among the companies. As Spanish footwear manufacturers
obtain a more intense relationship with local institutions, the probability of establishing collaboration agreements in the externalisation field increases. Nevertheless, it is important to point out how the present study also allows us to define some basic guidelines for a more efficient design of institutional programmes with regard to outsourcing promotion. Approaching public actions towards companies developing high value added activities might generate interesting results.
Notes 1. This Directory brings together, in just one source, all Spanish companies and their local units located in the country. A statistical exploitation of the results is published for companies and local units and is updated once a year. The directory generates aggregated information associated with the demography of companies: new companies, existing companies and closed companies, classified according to economic sector, legal condition and employee stratum. 2. The Federacio´n de Industrias del Calzado Espan˜ol (FICE) is the Spanish footwear manufacturer’s association. 3. The remaining footwear production is located in the regions of Aragon (Zaragoza), Murcia and Andalusia (Huelva) (FICE, 2007). 4. Firms were not specifically asked about their level of integration or disintegration before the period analysed. However, considering the traditional structure of the footwear industry and the high levels of externalisation evidenced in the reviewed Spanish literature (Tortajada et al., 2005; Ybarra and Santa Marı´a, 2006; Ybarra, 2006), we may presume a certain degree of disintegration. 5. The high concentration of the footwear industry and the auxiliary industry in the Vinalopo´ district and the profile of the sample explain the moderate volume of activities externalised in other Spanish areas. 6. AECA (The association of footwear components producers) confirmed that Spanish footwear providers are mainly located in the Vinalpo´ district, followed by the Arnedo– Calahorra district.
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7. Note that one emblematic product in this area is the espadrille, a specific type of shoe almost completely made by hand.
Acknowledgements The author wishes to acknowledge the solicitude of the five anonymous referees and the Managing Editor who read several drafts of the paper and provided helpful comments. Financial support by the Consellerı´a de Empresa, Universidad y Ciencia of the Generalitat Valenciana under the project GV05/090 is also gratefully acknowledged. A preliminary version of this research was published in 2009 as Working Paper no. 454 in the Working Papers Collection of the Fundacio´n de las Cajas de Ahorros (FUNCAS).
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