The decision to invest in a low-wage country: Evidence from Italian textiles and clothing multinationals

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