The Case of the Marche Footwear District, Italy

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Università degli Studi Dipartimento di Studi di Macerata sullo Sviluppo Economico

Working paper n. 23 March/2010

Moving Eastwards while Remaining Embedded: the Case of the Marche Footwear District, Italy

Eleonora Cutrini University of Macerata, Dipartimento di Studi sullo Sviluppo Economico

ISSN: 1971-890X

1 Moving Eastwards while Remaining Embedded: the Case of the Marche Footwear District, Italy

Eleonora Cutrini1 University of Macerata, Dipartimento di Studi sullo Sviluppo economico

Abstract The article contributes to knowledge about the evolution of industrial districts specialised in traditional manufacturing industries as a result of internationalization processes. On the basis of a longitudinal field study, the article describes the change in outsourcing firms’ behaviour that occurred in one of the main fashion-led Italian footwear districts during the period 2001-2009. After the well-known preferential destination towards Central and Eastern Europe, a second, more recent wave of delocalization over long distances is reported. De- spite intensified outsourcing abroad, subcontracting relationships remain deeply embedded, and the updated evidence indicates a possible homecoming to the original area.

Keywords: Industrial districts, evolution, outsourcing.

Acknowledgements I am indebted to the entrepreneurs and managers of the companies interviewed. I wish to thank Professor Gioacchino Garofoli for his comments on earlier versions of this work. Needless to say, inaccuracies and omissions remain solely my own responsibility.

Department Informations: Piazza Oberdan 3, 62100 Macerata - Italy Phone: +39 0733 258 3960 Fax: +39 0733 258 3970 e-mail: [email protected]

1University of Macerata, Dipartimento di Studi sullo Sviluppo Economico, Piazza Ober- dan 3, 62100 Macerata-Italy; [email protected]

2 E. Cutrini / WP n.23 DiSSE, University of Macerata

1 Introduction

Italian industrialisation in the 1970s and early 1980s was characterized by increasing specialisation in traditional sectors associated with the resilience of clusters of small firms producing tailored high-quality goods. Local productive systems were mainly located in the north-eastern and central regions of the country, in the so-called Third Italy (Bagnasco, 1977) or NEC Italy (Fuà, 1983), alternative expressions that emphasized the need to reconsider the north/south polarity which hitherto had been the dominant perception of the Italian economic landscape. Reinterpreting the Marshallian thesis, the industrial district was rediscovered as an alternative model of industrial organisation with respect to the large company, and in which the territorial division of labour was recognized as the central competitive advantage for local economic development (Becattini, 1979; Brusco, 1982; Garofoli, 1981, 1983). During the past two decades, increasing global trade in intermediate inputs has made apparent an upsurge in the disintegration of production processes across national borders, especially in the case of certain industries (e.g. footwear, electric and electronic machinery, toys, musical instruments) characterized by easy separation into self-contained stages, and by the fact that production stages vary considerably in the intensity with which they use the labour of different skill types, and which creates a rationale for moving non-skilled labour-intensive activity abroad. In order to remain competitive in international markets and to access emerging market economies – and fa- cilitated by improvements in transportation and communication technology – manufacturers in high labour cost regions of Europe have moved some of their labour-intensive stages and assembly operations to countries with lower labour costs (Feenstra and Hanson (1996), Feenstra (1998), Hummel et al., 1998, Arndt and Kierzkowski, 2001). As a result, Italian industrial districts specialized in traditional industries have changed profoundly. As delocalization practices have spread, it has become evident that research restricted to the internal organisation2 is not sufficient to grasp the recent development

2Although the industrial district was conceived as an open system because of its relation with the wider political, economic and social environment and with other local systems (Becattini and Rullani, 1993; Dematteis, 1989), outward backward and forward linkages were not central to the initial studies, which focused mainly on the structure of local economic ties.

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pattern of industrial districts – as a number of authors who have recently dealt with the internationalization of Italian local productive systems sug- gest (Schiattarella, 1999; Cutrini, 2003; Chiarvesio et al., 2006; Corò and Grandinetti, 1999a, 1999b, 2001; Biggiero, 2006). Some studies have speciﬁ- cally analysed the evolutionary patterns of Italian footwear districts in Veneto and Puglia, the other Italian regions where specialized clusters are present in the same industry (Grandinetti and Rullani, 1992; Micelli et al., 2003; Amighini and Rabellotti, 2006; Sammarra and Belussi, 2006)3. These empirical studies describe the main characteristics of the internationalization processes and the resulting restructuring of Italian industrial districts following the post-1989 institutional changes from planned to market economies in Eastern Europe which provided an unprecedented opportunity for un- bundling value chains over relatively short distances. However, more recent developments have been less investigated, even though the period since 2001 has been characterized by major challenges within the context of the clothing industry’s increasing global integration and liberalization. The period covered by the present study (2001-2009) is therefore particularly interesting for several reasons. First, in 2005, the long- lasting WTO import quotas on textiles and clothing (the on Textiles and Clothing at the multilateral level) were abolished. In Europe the path to- ward the sector’s full liberalization can be considered to have concluded at the end of 2007 when the UE-China Memorandum of Understanding, which imposed restrictions on Chinese imports of certain textile categories for a transitional period, expired. Second, the diﬀerential in labour costs between former member states and Central and Eastern European countries gradually vanished, particularly after entry by the latter into the European Union. Third, the gap in wages is still a source of competitive advantages for other developing economies, particularly the main emerging economies (the so-called BRICs). As a consequence, a second wave of internationalisation has taken place and, in sharp contrast to the preceding one, it has mainly occurred over long distances.

3On theoretical terrain, the increasing importance of international networks of production which criss-cross local economic systems entailed revision of the main theoretical notions underpinning the analysis on the evolution of industrial districts. After the global value chain analysis (Humphrey and Schmitz, 2002; Schmitz, 2004), further frameworks for simultaneous analysis of regional development, local institutions and global production networks were developed (see for example Dunford, 2003, Coe et al., 2004, Cooke, 2005, Parrilli, 2009).

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The aim of this study is to provide new evidence on this second wave of internationalisation and the related changes in subcontracting relationships that have recently occurred in the Marche footwear district. The methodology is based on a longitudinal ﬁeld study conducted in two years, 2001 and 2009, which enables assessment of the main changes that took place between them. The remaining sections are organized as follows. Section 1 reviews the relevant literature, section 2 introduces the area of the analysis, section 3 describes the sample and its main characteristics. Section 4 portrays the delocalization practices and the main changes occurring during the period examined. Section 5 discusses the results and the implications for the thickness of the local subcontracting network. The ﬁnal section concludes.

2 Where do we stand? A review of the relevant literature

During the past two decades, two main changes have affected the development of Italian and European industrial districts. First, observed facts have unravelled the internal heterogeneity of specialized clusters (Lazerson and Lorenzoni, 1999; Rabellotti and Schmitz, 1999) associated with an organiza- tional structure increasingly characterized by the pivotal role of larger firms. Secondly, the rise of more extensive geographic networks has characterized several industrial districts. The latter change has included the widespread delocalization abroad of a portion of the production process. As regards the first of these changes, the importance and possible implications of the escalation of leader firms which usually coordinate a business group have generated considerable debate since the early 1990s (Viesti, 1992; Dei Ottati, 1996b; Brusco et al, 1996; Cainelli and Nuti, 1996; Balloni and Ia- cobucci, 1997; Becattini, 1998; Brioschi and Cainelli, 2001). Most of the early evidence highlighted a strong tendency towards an increase in firms’ concen- tration within IDs. Brusco et al., 1996 suggested that this process was the result of the creation of business group relationships, rather than being the outcome of mergers and acquisitions of existing local firms. Other authors pointed out that this groupification implied the weakening of the cooperative and trust-based subcontracting ties traditionally deemed to underpin the local division of labor, which gave way to hierarchical (e.g. Cainelli and Nuti, 1996; Brioschi et al., 2002) and somehow formal relations (Becattini, 1998; Dei Ottati, 1996; Brioschi and Cainelli, 2001).

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Instead, according to Lazerson and Lorenzoni, 1999, the long-term and frequent relationships between leader firms and local subcontractors are gov- erned by a combination of trust and control mechanisms which allow flexible market arrangements while avoiding fixed hierarchical structures. The reasons for the emergence of leader firms and business groups have been related to the strategies required to face international competition. In particular, the growth of district groups may have been the result of two main strategies typical of the recent evolution of district firms: a vertical integration strategy, and a horizontal diversification strategy (Brioschi et al., 2002). Iacobucci and Rosa (2005) argued that the differentiation policy required to operate simultaneously in different market segments may also explain the entrepreneurial growth process achieved through the formation of business groups. In addition, further determinants explaining the formation of business groups are lower disinvestment costs, the need to resolve the family conflicts which often arise during inter-generational transfer, and the desire to keep human resources without losing ownership control, in particular when – as usually happens – new, linked firms are created by former employees of the group leader firm (Cainelli and Iacobucci, 2005). The central role of leader companies in local economic development has also been highlighted by Camuffo (2003) in his study of the Montebelluno eyewear district. He recognized that, although hierarchy seems to be the prevailing coordination mechanism within business networks, larger companies and small firms specialized in the production of components are not in contrast with each other; instead, they perform complementary roles. Carbonara (2002) investigated inter-firm relationships within a set of Italian IDs specialized in traditional industries and pointed out that the main trajectory of change experienced by leader firms has again been the formation of “structured inter-firm networks”. The second main field of inquiry into the recent evolution of industrial districts – and which provides an important interpretative framework for this study – concerns the nature, functioning, and the spatial extent of subcontracting relationships, which are of primary importance for understanding the different types and development patterns of industrial districts. This second body of studies is closely related to the first strand in the literature surveyed, because the increasing openness of subcontracting ar- chitectures has been usually orchestrated by local leader firms. Hence, the division of labour has lost part of the local embeddedness that was considered typical of the industrial district model. Early international evidence

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on the possible non-embeddedness of firms’ relationships in the US helped identify a variety of types of clusters which furnished a description of the concrete industrial organization of localized firms better than the traditional stereotype of the Marshallian industrial district (Markusen, 1996; Park, 1996; Storper and Harrison, 2001). More recently, Rama et al., 2003 have deepened the analysis of subcontracting patterns by showing that different types of clusters (Marshallian district, hub-and-spoke district, and the technology district), vary according to three important features of subcontracting networks: relative incidence of intra- and extra-district subcontracting, nature of subcontracting (hierarchical vs. collaborative), and production unit size and ownership. In Italy, Lazerson and Lorenzoni, 1999, have highlighted how the openness of industrial districts to external sources of knowledge has performed a vital role in local economic development. The increasing openness of IDs was accomplished through the entry of multinational firms which settled within the district’s boundaries, and through enlargement of the spatial extent of subcontracting linkages.4 The latter change had begun with the early relocation of more standardized tasks to proximate or more distant Italian regions (Dei Ottati, 1996; Lazerson and Lorenzoni, 1999). There- after, from the early 1990s onwards, outward linkages increasingly acquired an international dimension. Corò and Grandinetti (2001) and Corò and Micelli (2007) showed that leading firms in Italian IDs coordinate a system of worldwide suppliers. They also suggested that delocalization does not imply the complete abandonment of relationships with all local suppliers. Several empirical studies on the Italian IDs experiencing delocalization report that the main destination of outsourcing has been Central and East- ern Europe. Some flows towards Asia have been also reported, but they are considered to have been marginal until very recent years (Amighini and Ra- bellotti, 2006; Mariotti and Mutinelli, 2007; Micelli et al., 2003; Chiarvesio et al., 2006; Corò and Micelli, 2006; Corò and Micelli, 2007). To date, to the best of my knowledge, only one study has recognized the increasing importance of China and the Far East in the current geography of international outsourcing, at least if the focus is on internationalization in the Marche footwear district (Cerruti, 2008). These various studies agree that Romania is the main country of destina-

4In this regard, Lazerson and Lorenzoni, 1999, have pointed out the increasing attrac- tiveness of districts to external ﬁrms and the permeability of their boundaries.

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tion (Cutrini, 2003; Sammarra and Belussi, 2006; Amighini and Rabellotti, 2006), followed by Morocco and Tunisia (Sammarra and Belussi, 2006). Ad- ditional, temporary areas of delocalization have been Albania and Croatia (Amighini and Rabellotti, 2006). The literature has also recognized the existence of different delocalization patterns. Amighini and Rabellotti (2006) and Sammarra and Belussi (2006)5 conduct comparison between two polar cases of the Italian footwear and clothing industry. Their shared finding is that outsourcing practices differ according to the type of cluster (weak learning districts vs. innovative districts) (Sammarra and Belussi, 2006) and according to the value chain in which local firms are mainly inserted (Amighini and Rabellotti, 2006). The latter study suggests that the higher the market segment position, the lower the percentage of intermediate production outsourced abroad. Apart from the intensity of the outsourcing of production phases, which varies according to the nature of the district of origin, several authors have confirmed that strategic activities (such as prototyping, R&D, design, marketing and distribution) are usually retained within the district of origin6 (Camuffo, 2003; Cutrini, 2003; Rabellotti, 2004; Sammarra and Belussi, 2006; Cerruti, 2008). “Soft” forms of internationalization – mainly international subcontracting under the outward processing trade regime – have predominated (Cutrini, 2003; Mariotti, 2003; Amighini and Rabellotti, 2006), while FDI has been very rare, although the recent consolidation of medium and larger firms would have allowed it. Imitative processes have driven a veritable “migration” to new sites. Spe- cialized suppliers and subcontractors follow final firms or become quality con- trollers of the enterprises established in the destination area (Cutrini, 2003; Sammarra and Belussi, 2006). The reason for this behavior is related to the difficulty of transferring the tacit knowledge embodied in skilled workers and managers. In this regard, Biggiero has pointed out that knowledge transfer along the value chain cannot take place solely through ICT but requires the transfer of crucial “vectors”: people and goods endowed with complex competences and high value added (Biggiero, 2006; Biggiero, 2008).

5These two studies are speciﬁcally related to the present case study because they an- alyze delocalization patterns in Italian industrial districts specialized in footwear production. 6To be noted that the same occurred in the early episodes of relocation from the district of Prato documented by Dei Ottati, 1996a.

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Industrial districts specialized in mass production outsource a large part of their production process abroad (Amighini and Rabellotti, 2006); although even those district firms acting as subcontractors of high-fashion companies delocalize a portion of their less complex tasks (Rabellotti, 2004). The main shortcomings of existing studies on delocalization are the short period of their analysis, so that they can assess only the first wave of delocalization, and the limited or even non-existent combined appraisal of the internal evolution of the district under study, which may therefore vitiate interpretation of the results on delocalisation. Finally, another source of permeability of industrial districts has recently been identified and should be mentioned for the purpose of this study. Chi- nese micro-entrepreneurs are increasingly present in several Italian industrial districts specialized in the clothing sector, and they play a crucial role in capacity subcontracting (see Baculo, 2006 and Dei Ottati, 2009).

3 Some notes on the area of study

The Marche footwear district is located in the two provinces of Fermo and Macerata, in the southern part of the Marche region. Its origin dates back to the first decades of the nineteenth century, when the traditional artisanal production of “chiochierie” began to acquire the features of industrial activity (Sabbatucci Severini, 1989). Other historians maintain that the manufacturing of shoes in this area has even more ancient origins in the Middle Ages (Anselmi, 1989), although the large number of shoemakers of that period worked within a sort of municipal autarky, since they did not do business outside their town market (Rossi and Verducci, 1989). Today, the area is considered one of Italy’s most important industrial districts specialized in the production of shoes (Becattini, 1998). In fact, in 2001 the Marche region accounted for 29.2% of total national employment in the sector. Moreover, the Marche footwear district is the largest concentra- tion of shoes and accessories producers in Europe. It comprises more than 3 thousand final producers, and almost 500 shoe components firms employing 50,000 workers. The district is export-oriented, since more than 75% of the shoes produced are sold abroad, mainly in Germany, the USA, Russia and increasingly Asia, including China (Cerruti, 2008). The local productive system resembles the ideal-type of industrial district in that it is a network of final producers and a large number of complementary

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specialized suppliers – especially producers of parts and components (such as accessories7, soles and heels), model makers and designers. However, some stages of the value chain are external to the industrial district of Marche. The machinery manufacturers to which firms refer are located in other Italian regions, particularly the area of Vigevano in Veneto. The only tannery within the district - which used to have subcontracting relations with other, smaller tanneries in Veneto and Tuscany for particular treatments and processing - was present in the initial sample interviewed in 2001 but has now closed down. The Marche footwear district underwent a first internal restructuring during the 1990s, when local leader firms strengthened in line with the recent evolution of industrial districts reported in the literature (see section 1). Analysis of census data from 1991 to 2001 evidences an 8.2% decrease in employment in the Marche footwear industry, although this was lower than the decline at national level (-17.5%). Average firm size increased because of a reduction in the number of microenterprises (those with fewer than 10 employees) and a parallel consolidation of large companies (with more than 200 employees) (Cirese et al., 2008)8. In light of the above-mentioned changes, the following analysis concerns the set of medium-sized and larger firms which can be considered the industrial district’s leading companies now resulting from selection by global competition. These firms are also the central nodes for analysis of the evolution of the entire industrial district, because their choices and their strategies reverberate across the entire territory through their linkages with local subcontractors.

4 Description of the sample and the methodology

The research methodology was a longitudinal ﬁeld study carried out on the basis of semi-structured questionnaires. In-depth interviews were conducted face-to-face with entrepreneurs and company managers of local ﬁrms between

7To be noted is the presence within the district’s boundaries of a complementary cluster of producers of metal accessories for the clothing industry. Also to be noted is that the agglomeration of producers of soles in the Marche footwear district is a reference segment for shoe production throughout Italy. 8The increase in average ﬁrm size and the consolidation of medium and large ﬁrms are typical features of the last decade for many Italian industrial districts (see e.g. Mediobanca and Unioncamere (2005), Rabellotti et al., 2009).

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December 2000 and August 2001. The sample included final producers, subcontractors of accessories and producers of components (rubber soles). The companies interviewed were identified by using databases from the Chamber of Commerce, institutional information sources (mainly the Unione Industri- ali del Fermano), and personal contacts. In 2009, information was collected between June and October, focusing on the same variables, and using the same questions relative to innovation, internationalisation and subcontracting network already put to the firms interviewed in 2001. The comparison over time is based on the 23 leader firms that responded to both surveys. For identification of the district area9 I relied on the ISTAT methodology, except for one refinement. ISTAT classified a mutually excludable selection of SLLs as industrial districts for 2001 according to their main industry of specialization. I also included the SLLs of Mogliano and Recanati in the footwear industrial district by reason of proximity and because, although their main specializations were in other industries (Mogliano is specialized in the manufacturing of hats and clothing accessories while Recanati is specialized in the production of musical instruments), they comprised a large part of employment and firms in the shoe industry, a feature which should be taken into account. See Table A1 and A2 in the appendix for details. The set of firms interviewed accounted for a significant proportion of medium-sized and large firms in the entire district area: the sample covered almost 12% of the district’s firms with between 50 and 250 employees (medium-sized firms) and all the local large firms existing at the beginning of the observation period (see Table 1). The sampled companies represented a significant proportion of local leading firms involved in internationalization processes. In 1995, the average firm size in the sample of leader firms interviewed was 97 employees. Hence, the larger average size of the firms interviewed during the period 1995-2000 (see table 2) was consistent with the finding of previous studies that large firms consolidated during the 1990s (e Unioncamere (2005), Rabellotti et al, 2006). Their turnover was between 1 and 72 million euros in 2000, while the average workforce was 113 workers. During the last eight years of the period considered, whilst the value of sales increased on average – most likely as a result of the quality upgrading undertaken by most of the firms – a general decrease

9See Table A1 in the Appendix for further details on the municipalities and local labour systems considered as being part of the district area by the present study.

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Table 1: Distribution of ﬁrms interviewed by size

District Sample % Fewer than 10 employees 3137 1 0.03 Between 10 and 49 employees 874 7 0.8 Between 50 and 249 employees 111 13 11.7 250 employees and more 2 2 100 4124 23 Note: data on the district are taken from the 2001 Census

in employment occurred. The decrease in the average size of larger ﬁrms over the past eight years (table 2) is a novel feature which still cannot be substantiated by census data but can be explained in terms of the challenges raised by globalisation, and in terms of the increased foreign outsourcing of labour-intensive tasks by local leading ﬁrms – as will be explained in the following part of the section.

Table 2: Main characteristics of the sample, average values and % change

1995 2000 2008 2001-08 Turnover (millions of euros) 14 23 129% (1-72) (1.4-65) Export share over turnover (%) 58 53 -39% (15-98) (12-98) Employment 97 113 89 -96% (1-900) (3-1050) (94-380) Note: the range of values is in parentheses

During the period considered, firms lost part of their exporting capacity, in that the foreign sales share declined by 39% on average (table 2). This outcome is in part due to the devaluation of the US dollar with respect to the euro, which has been the main reason for the loss of market shares in the US by local firms during recent years. Moreover, the field study

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revealed the additional challenges faced by firms in the European market, and which certainly contribute to explaining this result. Unfavourable trends in key macroeconomic variables have undermined access to the firms’ main markets. In fact, the observation period was characterized by a long recession in the euro countries which are the main purchasers of Italian fashion goods. The demand decline in Europe is an additional reason for the fall in export shares and in employment levels. Furthermore, when the Multifibre Agree- ment and the following transitional period expired, Chinese products entered the European markets, crowding out several Italian producers in the low- quality market segments of European countries like Germany, Netherlands and France, which were formerly important export destinations of district firms. The resulting crisis of final producers has spread into the footwear district, where it has also affected local specialized suppliers (producers of accessories, soles, heels). Some have coped well with the crisis, others have had to un- dertake radical changes, while others have closed down their factories. To give an example of the deep restructuring: the remaining companies in the production of rubber soles underwent radical reorganization, with mergers and acquisitions of firms in difficulties by local larger companies. The crisis shrank the market by about 60-70% and, for example, as in the case of soles production in the Marche district, only the six largest firms survived. Employment dynamics thus exhibit a substantial decrease in employees (-96% on average) (table 2) related to the just-mentioned challenges raised by the European market and to the increasing implementation of outsourcing strategies. For the most part, foreign outsourcing has brought about a reduction of firms specialized in upper production, the so-called “tomaifici”, many of which have been forced to shut down their factories. The following section describes the main characteristics of outsourcing behaviour by local leader firms. It looks at the spread of delocalization practices among the firms interviewed, and the likely increase of the countries and production functions involved. It also seeks to identify whether there has been a reversal in the process whereby firms are moving their production stages back to Italy. Then addressed is a key related issue that can be summarized by the following question: how is the internal organization of the industrial district evolving, particularly with regard to the local network of subcontractors?

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5 An account of delocalization practices and their changes over the last decade

In the Marche footwear district, delocalisation practices date back to the late 1980s, when East-West interactions began under the outward-processing trade (OPT) model of production. In 2001, 11 out of the 23 observed firms (48%) had already delocalized at least one phase of their production process. Eight years later, among the same respondents, the proportion had increased to 61% (14 out of 23). These were final producers which declared that they used international outsourcing and specialized suppliers (such as retailers of accessories and producers of rubber soles) which had decided to migrate abroad to follow the relocation already undertaken by their district customers. In fact, during the observation period, some of the producers of components (rubber soles) included in the sample followed the delocalizing final producers by establishing new factories in the area of destination, and their export share declined accordingly. This pattern had been already made evident by the initial fieldwork (Cutrini, 2003) and was also consistent with the findings of comparable studies (e.g. Sammarra and Belussi, 2006). Two main additional modifications to firms’ final strategies explain the growing number of firms involved in international networks of production. First, some of the firms which, in 2001, had avoided delocalization by becoming subcontractors to high-fashion companies, were forced to overcome their initial reluctance to go outside the district. By way of example, one firm interviewed in 2009 reported that its main high-fashion buyer had sud- denly decided to halt orders, with the consequence that the firm had recently delocalized to Southeast Asia in order to restructure its financial status. It is consequently also possible to conclude that insertion in high-fashion value chains in a dependent position was not a successful strategy. Moreover, the final producers that, in 2001, had not yet resorted to international fragmentation were those producing very high quality goods. Firms producing high-fashion products requiring particular machinery and highly specialized workers used to privilege the district of which they were part when constructing networks. They did so because they regarded delocalisation as exposing them to product downgrading. The new evidence revealed that, in 2009, even the best-known and most successful brands in the district delocalized a portion of their production abroad, even to the Far East.

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It is interesting to note that not only had the number of local firms re- sorting to delocalization increased but the process had become increasingly important even for those firms which had begun outsourcing abroad during the early phase of delocalization (1995-2001). Most of the firms had experienced a growing number of phases and an increase of places on which they relied for foreign subcontracting (Table 3).

Table 3: Changes in the period 2001-2009

n % Growing number of delocalization places 5 36 Growing number of stages delocalized 5 36 Production back to Italy (partly undertaken or prospective) 3 21 No change 1 7 TOTAL 14 100

In other words, the delocalization process has deepened in recent years. In particular, whilst in 2001 it was rare to observe the outsourcing of the entire production process, in 2009 it became the main practice (see Table 4).

Table 4: The intensity of outsourcing

2001 2009 One stage (usually upper stitching) 2 (18%) 2(14%) Two stages of the production process (upper 7 (64%) 4(29%) cutting and upper stitching) Whole production process (upper cutting, 2 (18%) 8(57%) upper stitching and assembly) Total Respondents 11 (100%) 14 (100%)

Despite this increasing importance of outsourcing the entire production process, all the ﬁrms interviewed had continued to retain in-house execu- tive functions like product development, marketing, distribution and credit

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management. This distinguishing feature has remained unchanged in recent years, and it is consistent with the findings of the comparable previous studies surveyed in Section 1 (Camuffo, 2003; Rabellotti, 2004; Sammarra and Belussi, 2006; Cerruti, 2008). Therefore, from the perspective of the firms situated in the Italian local system, delocalisation is giving rise to increasing specialisation in higher value-added functions which, nonetheless, cannot signify the functional upgrading domestic firms. Often – as in the present case – they determine only a reduction of production stages in the existing firms, and also in the local system. The relative increase in commercial tasks and jobs (and the progressive transformation into commercial firms) does not mean functional upgrading, either within the firm or within the local system, as numerous cases of the destructuring and crisis of old industrial districts in Europe demonstrate. The choice of the host country seems to be influenced by a cyclical process that favours areas characterized by a combination of advantages relative to labour costs and transport costs, as well as by institutional factors like Euro- pean funding for joint ventures in Central and Eastern Europe. In 2001, the research revealed an obvious preference for Romania, where a twin local productive system had developed in the area of Timisoara and Arad, which until recently was the main destination of foreign outsourcing for the shoe-making district of the Marche region. At microeconomic level it is possible to determine the reasons for the emergence of spatially well-defined growth points in the main host country. The establishment of long-distance production networks requires a great amount of information on overseas partners and an initial investment in cus- tomisation (Grossman and Helpman, 2002) which together constitute important sunk costs. Accordingly, the first set of interviews revealed that the easy flow of information on delocalisation opportunities within the district was certainly one of the main reasons for the emergence of a localized cluster in Romania. In other words, entrepreneurs found it easier to follow the same path as other local entrepreneurs because these initially knew relatively more about this area. The sunk costs associated with the search for appropriate subcontractors also restricted the exploration process to a limited number of other localities. In particular, the emergence of the Romanian Timi? cluster was mainly due to its lower labour costs compared with other countries of Central Europe. There are, however, other factors that gave rise to the initial polarization in Romania. Another important incentive was the availability of

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skilled labour formerly employed in state-owned companies specialized in the same sector and inherited from the former planned economic system. More- over, proximity, both in its geographical and social variants, was another major determinant, as well as accessibility and the short distance from Italy (Cutrini, 2003).

Figure 1: Destinations of outsourcing by receiving country, number of ﬁrms in the sample

Note: the comparison includes only the ﬁrms that responded to both interviews

In the past eight years, radical changes have occurred, and long-distance sourcing has become increasingly important. Whilst internal relocation to South Italy has remained unaltered, delocalizing to Southeast Asia and the BRICs is becoming more frequent than delocalizing to Central and East- ern Europe and the Mediterranean countries (Figure 1). In 2001, Romania was the preferential destination of delocalization, and some other Maghreb and Central Eastern European countries – mainly Tunisia, Czech Repub- lic, Bulgaria, Hungary, Poland – were also involved in the process. By contrast, Southeast Asia and the main emerging market countries ( the so-called BRICs) were almost absent in the early geography of international fragmentation. At the beginning of the decade, only two ﬁrms in the entire initial

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sample had delocalized to China and India, respectively, whereas delocalization to Vietnam and Brazil was non-existent. In 2009, nine firms in the sample had delocalized to China, three of them undertaking part of their production process also in Vietnam. China is now the preferred place of delocalization, particularly for firms specialized in large volume production. The growing important of China as a place of production is confirmed by additional data collected by the interviews (see Table 5).

Table 5: Importance of China for the ﬁrm, 2009

n % Yes, mainly as a place of production 6 30 Yes, mainly as an export market 5 25 Yes, for both reasons 2 10 No 5 25 Not yet, but the ﬁrm is interested 2 10 Total 20 100

There are two reasons for the shift from the Euro-Mediterranean region to Southeast Asia. The first is that “new entrants” in the process – firms that have begun to outsource in the last eight years – choose China, Vietnam, India and Brazil. The second reason is that some firms which delocalized to CEECs at the beginning of the decade have moved their production phases eastwards because wages increased significantly in the CEECs. This eroded the main reason for seeking foreign subcontractors, namely the labour cost differential. In fact, all the firms interviewed reported that the main reason for outsourcing was the need to reduce production costs in order to withstand the competition of emerging countries. The standard neoclassical literature has argued that international outsourcing may be a means to gain access to the market (e.g. Feenstra and Hanson, 1996, Feenstra, 1998, Hummel et al., 1998). I consequently asked firms to state the main reason for delocalizing production abroad among the following alternatives: (1) to be closer to export markets; (2) to overcome the shortage of labour in the local market; (3) to face the competition raised by low-wage countries. The results showed that the first two reasons were

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almost irrelevant. Notwithstanding increasing intensity and the geographical shift eastwards, the governance of the international value chains has not greatly changed. The “soft” forms of internationalization (Cutrini, 2003; Mariotti, 2003; Amighini and Rabellotti, 2006) which characterized early delocalization to Central and Eastern Europe under the outward processing trade regime are still the dominant mode of governance of international value chains, even if they have been developing over longer distances (see Fig. 1). Local delocalising ﬁrms continue to rely mainly on international subcontracting to independent ﬁrms in the host country underpinned by market relations, while more legally binding ties like joint ventures, shared ownership with local partner (quasi-hierarchy), and property (hierarchy) are less frequent (see table 6).

Table 6: The governance of delocalization

2001 2009 n % n % Market 8 81 10 71 Quasi-hierarchy 1 6 2 14 Hierarchy 2 13 2 14 11 100 14 100

The prevalence of outsourcing to independent firms is possibly due to the fact that firms usually outsource different productive stages (from upper cutting to assembly) to several subcontractors located in different countries.10 This practise was pointed out by Cerruti (2008), who reported that “Processed leather is brought into the district after initial processing in Asia (mainly India and China). The leather is then checked, cut and prepared to be sent to Eastern Europe for further processing (mainly to Romania and Al- bania for sewing and hemming). Prepared leather is returned to the district for finishing and assembly”. Furthermore, at least for firms delocalizing to China, the low importance

10A limited number of ﬁrms rely on a single outsourcing destination (5 in 2001 and 6 in 2009).

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of hierarchy is possibly due to a legal environment which obliges foreign investors to have a local partner for at least some years before they are allowed to purchase a Chinese firm. Considering the increasing importance of China as a destination area and the persisting unimportance of hierarchy, it is likely that the low recourse to hierarchical modes of governance indicates that firms regard international outsourcing as a provisional strategy with which to face fiercer global competition. In fact, as shown in Table 3, some of the firms interviewed had brought part of the production tasks outsourced abroad back to the district, or were thinking of doing so in the near future. The present study confirms previous findings on the impossibility to left the whole coordination along the value chain through impersonal information and communication technology (Biggiero, 2006, 2008) even if long-distance sourcing now prevails. In 2001, it was already evident that Italian managers were responsible for supervision functions in the main Romanian destination area. Today, even entrepreneurs and managers of the parent firms outsourcing to Southeast Asia regularly travel (usually once a month) to the host area.

6 Discussion of results, some implications concerning the thickness of local subcontracting networks

Although the Marche footwear district has lost some of the features underpinning the collective competitive advantages due to delocalisation, it is still far from being a simple collection of ﬁrms. Instead, it is still richly endowed with certain distinguishing features of the Marshallian industrial district model. In fact, more recent information collected in 2009 revealed that some of the features typical of the original district model continue to characterize subcontracting relations, even if they have partly acquired an international dimension. A fairly high degree of local embeddedness still characterizes the network of subcontractors: more than two-thirds of the subcontractors of the leader ﬁrms interviewed still belonged to the local economy in both periods (Table 7). It is possible to argue that the Marche footwear district shares features with both the Marshallian and the “hub-and-spoke” models (Markusen, 1996; Rama et al. (2003) and may therefore be positioned between the two. The features in common with the former model are the prominence of specialized subcontracting and a high degree of embeddedness of the decentralized

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production, while it is also characterized by the one-way subcontracting – with large firms as clients and small specialized firms as subcontractors – which, according to Rama et al. (2003), is typical of the latter model. The firms interviewed reported a remarkable extension of their reference production network: the average number of subcontractors more than dou- bled in the observation period (Table 7). The increasing decentralization of production is not only the result of the differentiation strategy distinguishing the recent evolution of leader firms in industrial districts.11 It is also related to the intensification of delocalization practices which entails an increased number of subcontractors. In fact, recent conversations with entrepreneurs have allowed me to ascertain that the substitution of local subcontractors was typical of the early phase of delocalisation in the late 1990s and early 2000s. During the eight-year period analyzed, because the relevant substi- tutions had already occurred in the past, new foreign subcontractors had usually been added to the subcontracting network, whose extent was still largely local.12 It is possible to argue that the wide variety of components (uppers, linings, heels, soles) and accessories is usually the main reason why the full substitution of local subcontractors in the Marche footwear district has proved rather impractical. As already noted, subcontractor networks are still largely self-contained within the district, albeit to a lesser extent than eight years ago. On average, 70% of subcontractors belonging in 2001 to the production network of the respondent firms were located in the Marche district. In 2009, on average, 67% of subcontractors belonging to the value chain of the respondent firms were situated in the district (Table 7). In other words, the expansion of the subcontracting networks of the firms interviewed occurred slightly less within the industrial district’s boundaries than outside them. The growth

11The interviews showed that most firms had been upgrading product quality during the observation period, usually starting up the production of more complicated goods requiring a wider range of local specialized suppliers. Many firms now had two or more product lines for different market segments. 12Initially, delocalisation led to a selective substitution of local subcontracting relationships. While severing local ties in favour of international linkages, firms maintained in their networks the local subcontractors able to realise the highest quality level of parts and components at the lowest costs. Moreover, since price competition had increased, a crowding out of firms producing low quality goods occurred within the district (see Cutrini, 2003). The substitution and the crowding out effects had certainly reduced, at least in part, the thickness of the local division of labour.

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Table 7: Main characteristics of the subcontracting network

2001 2009 Number of subcontractors of each firm 20 47 (4-65) (3-500) Share of local subcontractors 0.70 0.67 (0.25-1) (0-1) Note: Average values of the sample, ranges in parentheses of subcontracting networks within the district’s boundaries has been due to the fact that local specialized suppliers and firms specialized in intermediate inputs offer unique advantages in terms of so-called localized external economies. Some entrepreneurs reported reliability, the high-speed delivery of parts, components and accessories, and long-lasting informal relationships with subcontractors as important components of the competitive advantages stemming from local production networks. Whilst competition underpins the relationships between final producers, confidence and cooperation are still important “relational assets” (Storper, 1997a, 1997b), in both local and international value chains. A mixed organi- zational governance – with the two “invisible hands” of the market and the community system” (Dei Ottati, 1991) – still seems to be the proper interpretative framework within which to understand the coordination between final firms and subcontractors. Subcontracting relationships are stable (only one respondent reported unsteady ties with subcontractors in both interviews), mainly informal (Table 8), and based on trust (Table 9). The predominance of long-term relationships can be explained in terms of the recent upgrading strategies of local leader firms: as already noted, firms were upgrading the quality of their products and starting to produce more sophisticated and specific goods during the observation period. These changes required the strengthening of long-term relationships which allow detailed and continuous coordination, joint problem-solving, and continuing mutual readjustments. The past eight years have seen a slight formalization of subcontracting relationships (Table 8): this process may be the consequence of either the groupification process, as stressed by part of the literature (see Section 1),

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or the increasing importance of Chinese subcontractors settled within the district (see Table 10), with which the ﬁrms interviewed declared that they relied on the standard economic conventions of written contracts. Or it may be the consequence of both.

Table 8: The relationship with subcontractors

2001 2009 n % n % Informal arrangements 17 81 14 61 Formal contracts 4 19 9 39 Total 21 100 23 100

The importance of cooperation and trust is evident if one looks at how firms protect their products within the network of subcontractors. Although firms share local subcontractors with other final producers – that is to say, each subcontractor works for different final producers13 – protection of the product is mainly and increasingly reliant on trust (Table 9). Nonetheless, also evident is that the growing emphasis on brands, and the practice of outsourcing a small part of production, are ways to protect the product. These results seems consistent with the view of Lazerson and Lorenzoni (1999), who argue that cooperation and trust are the result of the reciprocity underpinning the long-lasting relationships among district firms, rather than being resources buried in the local substratum and therefore readily accessible to all. Moreover, as some of the entrepreneurs interviewed suggested, trust is intermingled with different control mechanisms, as already pointed out by Lazerson and Lorenzoni (1999). It should be added that the local extension of subcontracting networks is, at least in part, related to a change process characterizing the current internal evolution of several Italian IDs specialized in textiles and clothing (see Baculo, 2006 and Dei Ottati, 2009). The Chinese micro-entrepreneurs (already present in 2001) who have settled in the area are increasingly impor-

13The information on the multi-ﬁrm relations of local subcontractors, as well as other information that substantiates the ﬁndings, are available from the author on request.

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Table 9: Protection of the product within the subcontracting network

2001 2009 n % n % Subcontracting a small portion of production 2 10 4 19 Trust 8 38 11 52 Hierarchy 2 10 1 5 Patent/brand 2 10 5 24 Not necessary 7 33 0 0 Total 21 100 21 100

tant sources for labour-intensive phases such as upper stitching. The ﬁnal ﬁrms interviewed reported that they increasingly drew on Chinese micro- entrepreneurs located nearby (table 10).

Table 10: Chinese local subcontractors

2001 2009 n % n % Yes 6 27 9 41 No 16 73 13 59 Total 22 100 22 100

The firms interviewed seem to have learned lessons from the early ex- perience of foreign sourcing. In 2001, it was evident that delocalisation or working as subcontractor to high-fashion companies were the only two alternatives available for firms producing medium-to-high quality products. Firms which adopted neither the first strategy (delocalisation) nor the second (licensed brand, subcontractor to a high-fashion company) were exposed to the risk of being crowded out by the competitive pressure exerted by producers located in low-wage countries and by the delocalising firms nearby. In 2009, almost all the firms interviewed – even those that had moved their production tasks abroad – were aware that it was impossible in the long run to base their competitive advantage on mass-produced commodities. They

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declared that they were trying to follow the high road of quality and design. According to the majority of entrepreneurs, Italian shoe production can only survive if it focuses on high-quality and high-fashion product lines. Con- sequently, some of them had already halted the production of standardized products outsourced abroad; while other entrepreneurs envisaged bringing the entire production process back to Italy in the near future (Table 4). This prospective change was further supported by the predominance of market mechanisms over hierarchy in the governance of global value chains (Table 5), which may be a sign of the temporary nature of outsourcing abroad. The envisaged homecoming of some delocalising firms will give the few remaining workers with highly specialized craft skills new opportunities to re-enter the local production system. In this regard, it is important to recall the main change undergone by the reference local labour market during the last two decades, which is consistent with increasing skills mismatch between demand and supply already highlighted in the literature as an important challenge for several other Italian IDs (see Garofoli, 2004). Workers specialized in the various tasks performed within the factories, and the female homeworkers that used to carry out upper stitching, have not been replaced by younger labour-market entrants.The higher educational at- tainments of young people compared with past decades has brought about a structural shortage of labourers willing to work in labour-intensive tasks. Instead, white-collars represent an over-skilled labour supply surplus to the operational requirements of industrial firms. The difficulties experienced in the local labour market – was reported by almost all the entrepreneurs interviewed both in 2001 and in 2009 – may explain the widespread use of immigrant workers in the local economic system (65% of firms interviewed in 2001 and in 2009).

7 Concluding remarks and further developments

The article has described the increased global involvement of local leader ﬁrms in the Marche footwear district during recent years, and it has identi- ﬁed persisting features and changes in their delocalisation strategies. It has also shown that, although delocalisation has certainly reduced the thickness of the local division of labour, particularly in the early wave of delocalization, the area studied is still endowed with important features typical of the Marshallian industrial district. The article should be regarded as a microeco-

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nomic contribution to full understanding of the macroeconomic evidence on the international fragmentation of production and the future of the clothing industry in Italy, and more generally, in the advanced economies. Hence, future research should assess whether the recently changing geography of outsourcing by the Marche footwear district is an exception, or whether it is the rule among Italian and European industrial districts. This will certainly enhance understanding of the future prospects of the clothing industries in advanced countries and assist in deciding whether and to what extent appropriate industrial policies should be designed. Moreover, as regards the local labour market effects of outsourcing, it will be important to assess whether the loss of employment in production functions is off-set by the growth of producer services providers, or other complementary activities with high intangible contents. This aspect is particularly important because young educated people want be employed in those activities, rather than becoming manufacturing workers. Furthermore, the more vulnerable local firms which will not survive the current crisis could find alternative economic activities in the tertiary sector. From a policy perspective, the agenda for restructuring industrial districts must focus on education and training policies. Strengthening the industry/university link is essential for enhancing the capacity of local systems to regenerate the sources of their competitive advantage and to pursue the “high road” of development in the new internal and external environment. A final consideration concerns the current economic crisis. The firms interviewed were highly heterogeneous in their capacity to cope with the current worldwide financial turmoil and with the credit constraints imposed even by their local banks. It is clear that larger firms with good capitalisation are more likely to survive the economic crisis, thus reinforcing the tendency towards the consolidation of larger companies. A selection of final producers is unquestionably occurring: the smaller number of firms that will survive “the storm” will also benefit from a less intense competitive environment which may enable them to abandon the road to delocalization.

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Appendix

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36 E. Cutrini / WP n.23 DiSSE, University of Macerata

DiSSE Working Papers

• n.22: Valentini E. On the Substitutability between Equal Opportunities and Income Redistribution • n.21: Ciaschini M., Pretaroli R., Socci C. La produzione di servizi san- itari e la variazione dell’output nei principali paesi UE • n.20: Cassiani M., Spigarelli F. Gli hedge fund: caratteristiche, impatto sui mercati e ruolo nelle crisi finanziarie • n.19: Cavicchi A. Regolamentazione e gestione del rischio nel settore agroalimentare. Alcune riflessiioni sull’approccio economico al Princi- pio di Precauzione • n.18: Spalletti S. The History of Manpower Forecasting in Modelling Labour Market • n.17: Boffa F., Pingali V. MIncreasing Market Interconnection: an analysis of the Italian Electricity Spot Market • n.16: Scoppola M. Tariffication of Tariff Rate Quotas under oligopolistic competition: the case of the EU import regimes for bananas • n.15: Croci Angelini E., Michelangeli A. Measuring Well-Being differ- ences across EU Countries. A Multidimensional Analysis of Income, Housing, Health, and Education • n.14: Fidanza B. Quale comparable per la valutazione tramite multipli delle imprese Italiane? • n.13: Pera A. Changing Views of Competition and EC Antitrust Law • n.12: Spigarelli F., Nuovi investitori globali: le imprese cinesi in Italia • n.11: Ciaschini M., Pretaroli R., Socci C. A convenient multi sectoral policy control for ICT in the USA economy • n.10: Tavoletti E., te Velde R. Cutting Porter’s last diamond: competitive and comparative (dis)advantages in the Dutch flower industry. Which lessons for Italian SMEs? • n.9: Tavoletti E. The local and regional economic role of universities: the case of the University of Cardiff • n.8: Croci Angelini E. Resisting Globalization: Voting Power Indices and the National Interest in the EU Decision-making

37 E. Cutrini / WP n.23 DiSSE, University of Macerata

• n.7: Minervini F., Piacentino D. Spectrum Management and Regulation: Towards a Full-Fledged Market for Spectrum Bands? • n.6: Spalletti S. Dalle analisi della crescita all’economia dell’istruzione e al capitale umano. Origine e sviluppo • n.5: Ciaschini M., Fiorillo F., Pretaroli R., Severini F., Socci C., Valen- tini E. Politiche per l’industria: ridurre o abolire l’Irap? • n.4: Scoppola M. Economies of scale and endogenous market structures in international grain trade • n.3: De Grauwe P. What have we learnt about monetary integration since the Maastricht Treaty? • n.2: Ciaschini M., Pretaroli R., Socci C. A convenient policy control through the Macro Multiplier Approach • n.1: Cave M. The Development of Telecommunications in Europe: Reg- ulation and Economic Eﬀects