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The Factory-Free Economy

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Studies of Policy Reform

Series Editors:
Daniel Cohen and Claudia Senik

This series brings new and innovative policy research to the forefront of
academic and policy debates.

It addresses the widest range of policies, from macroeconomics to welfare,

public finance, trade, migration, and the environment. It hosts collaborative
work under the auspices of CEPR and CEPREMAP.

Titles Published in the Series

The Economics of Clusters
Gilles Duranton, Philippe Martin, Thierry Mayer, and Florian Mayneris

Cultural Integration of Immigrants in Europe

Edited by Yann Algan, Alberto Bisin, Alan Manning, and Thierry Verdier

Happiness and Economic Growth: Lessons from Developing Countries

Edited by Andrew Clark and Claudia Senik

Charitable Giving and Tax Policy: A Historical and Comparative Perspective

Edited by Gabrielle Fack and Camille Landais

Productivity Puzzles Across Europe

Edited by Philippe Askenazy, Lutz Bellmann, Alex Bryson,
and Eva Moreno Galbis

Labour Market and Retirement Interactions

Edited by Jean-Olivier Hairault and François Langot

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The Factory-Free Economy

Outsourcing, Servitization,
and the Future of Industry

Edited by
Lionel Fontagné and Ann Harrison

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3
Great Clarendon Street, Oxford, OX2 6DP,
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Oxford University Press is a department of the University of Oxford.
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© CEPREMAP 2017
The moral rights of the authors have been asserted
First Edition published in 2017
Impression: 1
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You must not circulate this work in any other form
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Published in the United States of America by Oxford University Press
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Links to third party websites are provided by Oxford in good faith and
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contained in any third party website referenced in this work.

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Preface

Each industrial revolution produces its own organization of labour.

The first one created the factory system. The second invented mass
production and the assembly line. The third, the digital revolution, is
creating, in turn, something entirely new: a ‘factory-free’ economy.
The term is purposely ambivalent. It describes an economy in
which manufacturing, as we knew it, is vanishing. Firms, in advanced
economies, tend to specialize upstream and downstream: they
innovate, imagine new goods on the one hand, and try to sell them,
make them reach the customer on the other hand. The middle step,
producing the good itself, becomes the least important part of the
process. Pharmaceuticals are a good example of what is at stake.
Huge amounts of R&D allow firms to discover new molecules, while
doctors, in a face-to-face relationship to their patients, prescribe them.
Producing the drug is secondary. Richard Baldwin, in the opening
chapter of this volume, calls it the ‘smile curve’ economy. Value is high
at both extremes and low in between.
But the factory-free term also refers to a wider process that goes
beyond the end of manufacturing. It echoes a line of Serge Tchuruk,
former CEO of Alcatel-Lucent, heralding a world where firms would
have no factories and factories no workers. The old Taylorist system,
in which a hierarchical production process assigned to every worker
a task designed to be as repetitive as possible, is ending. Firms now
try to outsource as many tasks as they can. The old question raised
by economists: ‘why not just one firm’ has become: ‘why any firm
at all?’ Offshoring is part of a broader question: which tasks require
‘arms-length’ supervision and which can be outsourced? A new dividing
line, coined in the literature as routine vs non-routine tasks, is now
organizing labour worldwide.
These complementary dimensions of the ‘factory-free’ economy, the
‘servitization’ of the economy on the one hand and the new ‘division

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Preface

of tasks’ on the other, are superbly knit together in this volume. I’m
very grateful to Lionel Fontagné and Ann Harrison for having brought
together this brilliant collection of papers in a volume which will
certainly become a reference in the field.
Daniel Cohen
Director of CEPREMAP

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Acknowledgements

The initial idea of a book addressing such a challenging economic

policy issue is the outcome of stimulating discussions with Daniel
Cohen (PSE and CEPREMAP) on the future of advanced economies’
industry. The conference held to discuss initial versions of the chapters
received support from the CEPREMAP, the Wharton School (University
of Pennsylvania), the Centre d’Economie de la Sorbonne (University
Paris 1 and CNRS), the Paris School of Economics, and Labex OSE.
We also acknowledge financial support from the CEPREMAP and the
Wharton School for the preparation of this book. Philippe Aghion
(Harvard and Collège de France), Joseph Francois (World Trade
Institute), Nicholas Sly (Federal Reserve Bank of Kansas City), and
Thierry Verdier (PSE) attended the workshop and challenged our
ideas. Lionel Fontagné acknowledges long-standing support from
the CEPII for studying countries’ specializations and world economy
transformations. Anna Ray and Elsa Leromain provided excellent
support in the preparation of the final manuscript. Aimée Wright has
been a patient and efficient correspondent between us and our editor.

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Contents

List of Figures xi
List of Tables xiii
List of Contributors xvii

Introduction 1
Lionel Fontagné and Ann Harrison

1. Factory-free Europe? A Two Unbundlings Perspective on

Europe’s Twentieth-century Manufacturing Miracle and
Twenty-first-century Manufacturing Malaise 24
Richard Baldwin

2. Hollowing Out of the Japanese Economy: A Long-term

Perspective 67
Michael J. Ryan and Farid Toubal

3. Structural Change in the OECD: Some Facts 86

Jean Imbs

4. The Servitization of French Manufacturing Firms 111

Matthieu Crozet and Emmanuel Milet

5. Factoryless Goods Producers in the USA 136

Andrew B. Bernard and Teresa C. Fort

6. Fragmentation: Survey-based Evidence for France 169

Lionel Fontagné and Aurélien D’Isanto

7. The Skill Bias of the US Trade Deficit 197

Rosario Crinò and Paolo Epifani

8. Why are American Workers Getting Poorer? China, Trade,

and Offshoring 222
Avraham Ebenstein, Ann Harrison, and Margaret McMillan

9. Offshoring, Wages, and Employment: Evidence from Data

Matching Imports, Firms, and Workers 257
Francis Kramarz

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Contents

10. Globalization and Structural Change: Upheaval in the

Nineties or in the Noughties? 302
Matteo Fiorini, Marion Jansen, and Weisi Xie

11. Are Clusters More Resilient in Crises? Evidence from

French Exporters in 2008–2009 328
Philippe Martin, Thierry Mayer, and Florian Mayneris

Author Index 353

Subject Index 357

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List of Figures

1.1 Globalization: one paradigm or two? 27

1.2 Number and share of employment in manufacturing, rich
nations, 1970–2010 28
1.3 European shares of global manufacturing, 1970–2010 29
1.4 European share winners in manufacturing, 1970–2010 29
1.5 GDP and GDP per capita from year 1 to 1913, various regions 31
1.6 Trade costs and trade volumes, 1870–1910 32
1.7 Growth of global internet hosts and phone lines, 1975–2011 37
1.8 Indirect measures of supply-chain trade from the 1960s 37
1.9 Schematic illustration of reimporting and reexporting supply
chain trade 38
1.10 Factory Europe: Germany and low-wage factory economies, 2009 39
1.11 Re-exporting/re-importing flows for UK, France, and Italy, 2009 39
1.12 Seven risers and seven losers: manufacturing reversal of fortunes 40
1.13 Take-off in BITs, FDI, unilateralism, and deep RTAs 41
1.14 Comparative advantage in the first and second unbundlings 44
1.15 Supply-chain trade with intermediate goods and no technology
lending 45
1.16 Stabilizing and destabilizing integration: first and second
unbundlings 49
1.17 Tasks, occupations, stages, and product—the TOSP framework 50
1.18 Wage differences in Factory Asia, Factory North American, and
Factory Europe 54
1.19 Education and R&D: ASEANs, China, Korea, US, Japan, and
Canada, 2005 54
1.20 The smile curve: good and bad stages in the value chain 55
1.21 Breakdown of the Nokia N95’s €546 pre-tax retail price circa 2007 56
2.1 Growth rates in the numbers employed by domestically-based
parent companies and overseas subsidiaries 73

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List of Figures

2.2 Share of overseas affiliates classified in a different business line

than their Japanese parent 75
2.3 Average annual percentage change in parent and overseas affiliate
employment (1991–2000) 76
2.4 Domestic employment and firms’ status, 1983 and 2000 77
4.1 Service intensity: share of services in production sold 116
4.2 Distribution of the share of services in production 118
4.3 Exports of differentiated products and service intensity 121
4.4 Firm characteristic and production mix in 2007 123
4.5 The servitization of manufacturing: aggregate trends 124
4.6 Firm-level trend in service intensity 128
4.7 Evolutions of employment and value added using the share of
services in production sold as weights 130
5.1 From idea to customer 137
5.2 Design and manufacturing activities at wholesale establishments,
2002 147
5.3 Design and manufacturing activities at wholesale plants, 2007 149
5.A1 Census design and manufacturing questions, 2002 165
5.A2 Census design, primary activity, and outsourcing questions, 2007 165
5.A3 Industries not asked the establishment activity questions, 2007 166
7.1 Trade imbalances and relative demand for skills in US
manufacturing 198
7.2 The borderline commodity 202
8.1 Trends in employment and wages in the manufacturing and
service sectors 231
8.2 Trends in domestic and affiliate employment among
multinational firms 233
8.3 Trends in manufacturing affiliate employment in low-income
countries 233
10.1 SCI (value added) and GDP per capita growth in industrialized
countries 315
10.2 SCI (value added) and GDP per capita growth in (other) Asian
economies 315
10.3 SCI (value added) and GDP per capita growth in Latin American
economies 316
11.1 Map of competitiveness clusters 333
11.2 Survival probability (firm—sector—destination country export
flow) 338

xii

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List of Tables

1.1 Per capita industrialization levels, 1759–1913 26

1.2 City sizes from year 1 to 1900 (populations in hundreds of
thousands) 33
2.1 Summary statistics on Japanese outward FDI 71
2.2 Japanese FDI by major geographic region 72
2.3 Japanese overseas production ratio 74
2.4 Sample summary statistics (1983–2000, number of observations:
15,944) 79
2.5 Between estimates of labour demand: Japanese parent 80
2.6 Within estimates of labour demand: Japanese parent 81
2.A1 Dynamic panel analysis: Arellano Bond estimates 83
3.1 Employment growth 88
3.2 Structural change in the OECD 94
3.3 Detailed trends in manufactures 95
3.4 Detailed trends in services 97
3.5 Structural change over time 99
3.6 Decomposition of manufactures over time 102
3.7 Decomposition of services over time 103
3.8 Growth consequences of structural change 107
4.1 Number of firms, employment, and value added in
manufacturing 117
4.2 Share of firms with at least 50 per cent of services production
sales, 2007 119
4.3 Servitization premia 122
4.4 Change in service intensity between 1997 and 2001 126
4.5 Change in service intensity between 2003 and 2007 127
4.6 Transition matrix between 1997 and 2007, 32,053 firms 128
5.1 Design and manufacturing activities at wholesale plants, 2002 146

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List of Tables

5.2 Design, contract manufacturing, and primary activity at

wholesale plants, 2007 148
5.3 Plants, sales, and employment by FGP status and census, 2002 152
5.4 Plants, sales, and employment by FGP status and census, 2007 154
5.5 Plant characteristics by FGP status and census, 2002 155
5.6 Plant characteristics by FGP status and census, 2007 157
5.7 Firm counts by FGPF status, 2002 and 2007 158
5.8 Firm characteristics by FGPF status, firm type, and census, 2002 160
5.9 Firm characteristics by FGPF status, firm type, and census, 2007 161
6.1 Evolution of firm employment, according to the offshoring
status, as a percentage of number of employees in firms 178
6.2 Firms with fifty or more employees that sourced in France or
offshored activities, over the period 2009–2011, as a percentage of
the number of firms 180
6.3 Firms with fifty or more employees that sourced in France or
offshored activities over the period 2009–2011, as a percentage of
the number of employees in firms 181
6.4 European countries (that carried out the survey) firms with 100 or
more employees that offshored activities between 2009 and 2011,
as a percentage of the number of firms 181
6.5 Share of firms that offshored activities during the period
2009–2011, according to different criteria 182
6.6 Share of firms that offshored activities during the period
2009–2011, by activity sourced, sector, and size 184
6.7 Barriers indicated as important or very important by firms that
considered offshoring during the period 2009–2011, but decided
against it, as a percentage of the number of firms that considered
offshoring but decided not to offshore 185
6.8 Barriers indicated as important or very important by offshoring
firms that offshored to only one region during the period
2009–2011 (for each region, as a percentage of firms having
offshored only in this region) 186
6.9 Main host areas for offshored activities during the period
2009–2011, as a percentage of the number of offshoring firms 187
6.10 Main host areas for offshored activities during the period
2009–2011, as a percentage of the number of employees in
offshoring firms 189
6.11 Manufacturing sector: main host areas of offshored activities
during the period 2009–2011, as a percentage of the number of
employees in offshoring firms 190

xiv

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List of Tables

6.12 Number of offshoring firms (100 employees or more) located in

one of the fifteen countries which carried out the survey, by main
offshoring destination 191
6.13 Organizational mode for newly offshored activities between 2009
and 2011, by firms belonging to a group, as a percentage of the
number of employees in the offshoring firms 192
6.14 Motivations indicated as important or very important by
offshoring firms that offshored to only one region during the
period 2009–2011 (for each region, as a percentage of firms
having offshored only in this region) 194
7.1 Estimates for the aggregate manufacturing sector 209
7.2 Industry-level regressions: baseline estimates 212
7.3 Industry-level regressions: controls for underlying trends 214
7.4 Industry-level regressions: controls for contemporaneous shocks 216
7.5 Industry-level regressions: US trade balance with China and the
rest of the world, baseline estimates 217
7.6 Industry-level regressions: US trade balance with China and the
rest of the world, robustness checks 218
8.1 OLS estimates of wage determinants using industry and
occupational exposure to offshoring and trade, 1983–2008 234
8.2 OLS estimates of wage determinants using occupational exposure
to offshoring and trade among subsamples of CPS workers,
1983–2008 237
8.3 Wage changes observed over two periods among manufacturing
workers who switch industry, 1983–2008 240
8.4 Summarizing patterns in trade and offshoring: five largest
observations for each category 243
8.5 Occupational exposure to offshoring by destination 244
8.6 Comparing the wage impact of imports from China versus
offshoring to China 245
8.7 Offshoring to China and labour force participation, 1983–2008 247
8.8 OLS estimates of employment determinants and occupational
exposure to offshoring and trade among individuals observed
over two periods, 1983–2008 249
8.9 OLS estimates of employment determinants and occupational
exposure to offshoring to China and trade among individuals
observed over two periods, 1983–2008 250
8.A1 Sample averages for Current Population Survey merged outgoing
rotation group workers, 1983–2008 252
9.1 Rents and outsourcing 275

xv

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List of Tables

9.2 Employment and outsourcing 277

9.3 Workers’ wages: workers’ bargaining power and firm-level
imports, controlling for competitors’ imports 279
9.4 Negotiation in 1992 and firm-level changes in the preceding
period (1986–1992) 286
9.A1 Descriptive statistics 294
9.A2 Using US export prices to instrument the price of value added in
French manufacturing 295
9.A3 Summary of the signs and significance of the coefficients in the
regression of quasi-rent (for firms negotiating on employment)
on US export prices to various destinations 297
9.A4 Strength of the instrumenting regressions 298
10.1 Percentage point changes of sectors’ contribution to the US
economy 305
10.2 Percentage point changes of sectors’ contribution to selected
major exporting economies 307
10.3 Structural change (SCI) in the USA 312
10.4 Summary statistics of 10-year SCI (value added) 312
10.5 Summary statistics of 10-year SCI (employment) 313
10.6 Explaining structural change in terms of value added 318
10.7 Growth and structural change 320
10.A1 Percentage point changes of sectors’ contribution (value added)
to selected G-20 economies 323
10.A2 Percentage point changes of sectors’ contribution (employment)
to selected G-20 economies 325
11.1 Firm-level descriptive statistics 337
11.2 Survival probability: linear probability model (single-plant
firms) 340
11.3 Growth-rate between t–2 and t–1 firm/hs2/country (single-plant
firms) 343
11.4 The role of the leader (single-plant firms) 345
11.A1 Survival probability by sector 348
11.A2 Survival probability: linear probability model (all firms) 349
11.A3 Growth-rate between t–2 and t–1 firm/hs2/country (all firms) 350

xvi

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List of Contributors

Richard Baldwin, Graduate Institute, Geneva and Oxford University

Andrew B. Bernard, Tuck School of Business at Dartmouth, CEPR and NBER
Rosario Crinò, Catholic University of Milan and CEPR
Matthieu Crozet, Chinese University of Hong Kong
Aurélien D’Isanto, INSEE, Paris
Avraham Ebenstein, Hebrew University of Jerusalem
Paolo Epifani, University of Nottingham (UK and Ningbo, China)
Matteo Fiorini, European University Institute
Lionel Fontagné, Paris School of Economics-Université Paris 1 Panthéon
Sorbonne and CEPII
Teresa C. Fort, Tuck School of Business at Dartmouth, CEPR, and NBER
Ann Harrison, The Wharton School, University of Pennsylvania and NBER
Jean Imbs, Paris School of Economics (CNRS) and CEPR
Marion Jansen, International Trade Center (UNCTAD-WTO)
Francis Kramarz, CREST, ENSAE, Paris-Saclay University
Margaret McMillan, Tufts University and NBER
Philippe Martin, Sciences-Po and CEPR
Thierry Mayer, Sciences-Po, Banque de France, CEPII and CEPR
Florian Mayneris, Université catholique de Louvain, IRES and CORE
Emmanuel Milet, University of Geneva
Michael J. Ryan, Western Michigan University, USA
Farid Toubal, Ecole Normale Supérieure de Cachan and CEPII, France
Weisi Xie, Antai College of Economics and Management at Shanghai Jiao Tong
University, China

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Introduction
Lionel Fontagné and Ann Harrison

De-industrialization was accelerated by the 2008–2009 crisis in most

high-income countries. Yet the trend began decades earlier, as compar-
ative advantage of emerging economies shifted towards more advanced
goods and their growing populations commanded an increasing share
in global demand. This shift towards a factory-free economy in high-
income countries has drawn the attention of policy makers in North
America and Europe. Some politicians have articulated alarming views,
initiating mercantilist or beggar thy neighbour cost-competitiveness
policies. Yet companies like Apple, which concentrates research and
design innovations at home but no longer has any factories in the USA,
may be the norm in the future.
This ongoing transformation of the industrial economies may be
consistent with evolving comparative advantage, but has significant
short-run costs and requires far-sighted investments. These include
the costs to workers who are caught in the shift from an industrial to
a service economy, and the need to invest in new infrastructure and
education to prepare coming generations for their changing roles. A
conference held in Paris aimed to provide an economic analysis of this
phenomenon. A selection of the papers presented has been chosen as
a starting point for this book. Since then, authors have revised their
papers, prolonged their research, refined their conclusions, and drafted
stimulating chapters summarized here.
Richard Baldwin starts off the volume by dividing global forces for
trade and industrialization into two historical periods. In the first
period, which he refers to as ‘globalization’s first unbundling’, falling
transport costs and freer trade allowed the industrial countries to
rapidly industrialize and dominate manufacturing. From the industrial

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Lionel Fontagné and Ann Harrison

revolution to the early 1980s, rich countries benefited from a virtuous

cycle of innovation, agglomeration, and increasing competitiveness in
manufacturing. Manufacturing wage increases were more than offset by
productivity increases, and G7 nations saw their share of world gross
domestic product (GDP) soar from a fifth in 1920 to two-thirds by
1990. Baldwin attributes most of the impetus for globalization during
this period to improvements in transport, which radically lowered
transport costs and allowed countries to exploit scale economies and
comparative advantage. With agglomeration, cities grew in size and the
North industrialized while the South de-industrialized.
Beginning sometime between 1985 and 1995, according to Baldwin,
this trend reversed. This is the so-called ‘second unbundling’, when
the nature of globalization changed and led to the upheaval which
is the focus of our book. Baldwin zeroes in on the information and
communication technologies (ICT) revolution as the driver of this
change, as telecommunications became cheaper and more reliable.
The ICT revolution was accompanied by the increasing integration
into the global economy of a small number of developing countries,
which rapidly increased their share of global manufacturing as well
as global GDP. While the first unbundling made it easier to buy and
sell goods internationally, according to Baldwin ‘the ICT revolution
changed this. High-tech firms found it profitable to combine their
firm-specific know-how with low-wage labour in developing nations’.
European firms could now combine their manufacturing technology
with labour outside of Europe.
Baldwin describes the changing nature of globalization as shifting the
drivers from lower transport costs and tariffs which made it possible to
concentrate production and exports in the North, to ICT innovations
which allow manufacturing to be dispersed and sent to the South. He
also introduces the concept of ‘smile curve economics’, first proposed
by Acer founder Stan Shih, whereby the share of who appropriates value
added follows a so-called smile: high at the design phase, lower during
the manufacturing phase, and high again in the distribution phase. He
points out that the smile ‘deepened’ during the second unbundling, as
manufacturing’s share in value added fell with industrialization in the
South.
What does all this imply for manufacturing jobs in Europe? Baldwin
paradoxically concludes that while industrial country manufacturing
firms are likely to retain a leading role, manufacturing jobs in the
North will continue to decline. Industrial country firms will continue to
extract a large share of value added through their role in product design
and research and development (R&D), as well as sales, marketing, and

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Introduction

after sales services, and will contract out or oversee manufacturing in

the ‘South’. While some manufacturing jobs will remain at home, they
will more likely be the high-skill intensive jobs. While value added may
remain in industrial countries, it is unlikely that this will bring more
factory jobs. These shifts will support the ever-increasing importance
of cities, which Baldwin concludes ‘are to the twenty-first century what
factories were to the twentieth century. Urban policy will be the new
industrial policy’.
The bottom line is that there is nothing like a traditional factory
in the twenty-first century. Tasks have been split according to Adam
Smith’s view of the pin factory, but thanks to digitization at the global
level. This has led to a dramatic reshaping of tasks maintained in the
high income economies. Growth is now fuelled by talents and their
agglomeration. Services and industry are one and the same thing, and
if there is something like a factory, this is now the big city where talents,
ideas, and services can be combined. Hence the economic competi-
tion between agglomerations and the related policies to support their
development. The big challenge, from a macroeconomic perspective is
the induced disconnection between the creation of value added and
the creation of jobs. Although the other face of this coin is produc-
tivity gains, distributional issues will become increasingly relevant in
advanced economies as value is now shaped by intangible assets.
Japan is certainly one of the most affected of the advanced eco-
nomies: specialization in electronic equipment, scarcity of resources,
and offshoring to low-cost locations for most industrial tasks combine
here in a large shock to the domestic industry. Japan’s hollowing out is
the focus of the second chapter of the book, co-authored by Michael
Ryan and Farid Toubal. Ryan and Toubal analyse a unique dataset
following Japanese firms between 1982 and 2001. Their data allow
them to identify whether Japanese multinational firms were responsible
for the hollowing out of the economy in shifting manufacturing
jobs abroad.
Ryan and Toubal focus on the so-called lost decade which followed
Japan’s economic collapse in 1991. They begin by documenting that an
enormous expansion in Japanese multinational activity began around
that time. The number of Japanese multinationals jumped by 290 per
cent between 1985 and 1992, and continued to rise at a slower pace
after that. While Japanese overseas production was just over 3 per
cent in 1982, it increased by five fold over the next twenty years to
reach 17 percent in 2002. Ryan and Toubal also document that over
these decades Japanese multinational firms reallocated their networks
from North America to Asia and Europe. The share of Japanese vertical

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Lionel Fontagné and Ann Harrison

affiliates (located in a different business line than their parents) more

than doubled in these two regions while it halved in North America.
The aggregate employment data for Japanese multinationals are
strongly suggestive of a hollowing out. Between 1997 and 2012, for the
manufacturing sector as a whole Japanese parents reduced domes-
tic employment by almost 3 per cent. While employment in Japan
shrank in most sectors, Japanese multinationals expanded employment
abroad. Econometric evidence confirms that Japanese multinationals
contracted domestic employment post-1991, although over the entire
two decades the effect is surprisingly small and insignificant. This is
partly because other Japanese companies also experienced employment
stagnation, so that in comparison Japanese multinationals do not
appear to engage in significant hollowing out. Compared to non-
multinationals, Japanese multinational companies (MNCs) reduced
domestic employment by 0.17 per cent per year from 1992 to 2001,
mostly in vertically organized firms.
Ryan and Toubal conclude that there is only limited evidence of
hollowing out of the Japanese economy by Japanese multinational
enterprises (MNEs) moving production abroad. They hypothesize that
the limited effect on domestic employment of outward Japanese MNE
activity could be due to the well-known lifetime employment policies
adopted by many Japanese firms. Since their formal analysis stops in
2001, it is also possible that the negative effects accelerated after that
period.
An alternative way to think about the de-industrialization in rich
countries documented in Chapters 1 and 2 is through the concept of
structural transformation. Recent databases on trade in value added
show that goods trade cannot easily be distinguished from services
trade, and this is more so for advanced economies. This mirrors the
shift from manufacture to services which has been documented by
Hollis Chenery and Moises Syrquin, among others. As income per
capita increases, there is a shift in the sectoral structure of the value
added, employment and consumption patterns. All in all, the shift
in value terms is magnified, compared to evolutions of value added
in volume. But the implied reduction in the labour share (as labour
shifts towards less productive sectors) is at odds with a balanced growth
path combining a constant growth rate of real per capita output,
a constant capital–output ratio and a constant labour income share
over time.
Jean Imbs in his chapter describes this structural transformation tak-
ing place in countries of the Organisation for Economic Co-operation
and Development (OECD). He documents that de-industrialization of

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Introduction

rich economies is accelerating, as labour moves away from industrial

sectors. Imbs notes that ‘this reallocation is taking centre stage in
political circles, where calls for industrial policy, rising regulation or
protectionism are heard increasingly loudly’.
Imbs documents the main features of structural change in fifteen
OECD countries since 1970. He identifies that de-industrialization
began in the OECD in the 1980s, but only in terms of changes in the
allocation of labour, not the allocation of value added. Beginning in
the mid-1980s, employment shares decreased in manufacturing, and
increased in services. Imbs measures the changes in sectoral shares over
four decades. He finds that on average, employment shares in manu-
facturing have declined by 1.7 per cent per year since 1970, whereas
employment shares in services have increased by 1.3 per cent per year.
Measured in terms of employment per se, manufacturing employment
fell by 1.23 per cent per year while services employment increased
by 1.82 per cent. But the same is not true of the sectoral allocation
of value added. In particular, between 1970 and 2011, the share of
manufacturing in value added does not display any significant trend. As
labour productivity rose more quickly than elsewhere, this actually also
translated into higher wage growth for manufacturing than for services.
The reallocation of employment away from manufacturing is consistent
with Baumol’s (1967) view that sectors with relatively high productivity
growth lose employment.
Imbs finds that for the OECD countries, the share of the manufactur-
ing sector in value added exhibited no clear downward trend between
1970 and 2011, whereas the share of services increased. This is quite
different from the conventional view going back to Chenery, Robinson,
and Syrquin (1986), where the reallocation goes from manufacturing
to services. Falling employment in manufacturing but stable value-
added shares are associated with rising productivity and wages in the
manufacturing sector. As Imbs points out, ‘de-industrialization would
not be apparent just on output data’, which ‘suggests quite some
resilience in industrial production’.
Imbs also unpacks the trends within both manufacturing and
services. While light industries fell precipitously, the share of heavy
industries (including metals, metal products, machinery, equipment,
and transport equipment) actually increased as a share of value added.
In services, the number one recipient of employment was adminis-
trative services, and the star in terms of output gains was ICT—where
employment, value added, and productivity growth all increased.
Examining changes in structural transformation between
1970 and 2011, Imbs makes three additional observations. First,

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Lionel Fontagné and Ann Harrison

de-industrialization did not begin until the mid-1980s, and the share
of manufacturing value added remained roughly constant until the
year 2000, when de-industrialization accelerated. We comment in
passing that the precipitious decline in manufacturing around this
period has been noted by others, particularly Justin Pierce and Peter
Schott, who associate it with China’s entry into the World Trade
Organization (WTO) in late 2001.
Second, Imbs notes that the share of construction in value added con-
tracted somewhat in the 1990s but accelerated following the 2007–2008
financial crisis. Finally, services has both accelerated its share in gross
domestic product (GDP) and its share in employment, with the result
that employment is being drawn to the lowest productivity sector. Imbs
concludes his chapter by noting that one reason why ‘structural change
is back with a vengeance in policy conversations’ is that post-2000
output shares of manufacturing in value added in the OECD finally
declined. In the last six years of his sample, both labour and output
shares collapsed simultaneously in heavy manufacturing. It was not
until the 2000s, and the great recession, that manufacturing output
shares collapsed across all sectors in the OECD.
Whatever the mechanisms at play, Chapter 4 suggests that the shift
from industry to services is to some extent a matter of definition. In the
words of Matthieu Crozet and Emmanuel Milet, ‘the frontier between
manufacturing and services is quite blurry’. How do we define an indus-
try? Does one refer to large-scale production, increasing returns, new
consumption items that are increasingly affordable to the consumer?
Taking such a broad view, many services could compare with industries.
And even within manufacturing industry in the usual sense, services
represent an increasing share of value added. The shift towards services
within the manufacturing sector is known as the ‘servitization’ of the
manufacturing sector.
Crozet and Milet document the importance of the servitization of
French manufacturing firms over the 1997–2007 period. They define
servitization as the increase in the share of services in firms’ production
sales. They have a database of about 635,000 French manufacturing
firms, which allows them to identify trends in the percentage of
services produced and sold within manufacturing firms during that
time period.
While most of the literature on de-industrialization focuses on the
types of shifts from industry to services documented in Chapter 3 by
Jean Imbs, Chapter 1 by Richard Baldwin and Chapter 4 by Crozet
and Milet show that these same trends are very much present within
French firms themselves. They document a moderate, but significant

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Introduction

and steady increase in servitization over the period. They also decom-
pose the trend into between and within firm changes, and find that
servitization is mainly driven by changes that occur within firms. By
the end of their sample period, in 2007, they document that 83 per
cent of manufacturing firms sold some services, 40 per cent sold more
services than goods, and 26 per cent did not even produce goods.
There are both positive and negative implications of Chapter 4 by
Crozet and Milet. On the one hand, taking servitization into account
provides a harsher diagnosis for de-industrialization of the French
economy. Crozet and Milet estimate that the decline in the proportion
of workers involved in the production of goods has been up to 8 per
cent higher than the usual measures of de-industrialization based on
the proportion of workers employed in manufacturing firms. On the
other hand, Crozet and Milet argue that this kind of within firm shift
towards services has a much more benign and likely beneficial impact
on workers than the intersectoral shifts occurring at the macro level.
While job losses in manufacturing and job creation in services sectors
in the aggregate industrial economies are creating large social costs,
the services provided by manufacturing firms are quite different. These
services—think of an Apple or a Rolls Royce—are typically strongly
linked to the product they sell. Crozet and Milet optimistically conclude
that ‘this strong complementarity is likely to support the sales of
manufacturing products and to defend manufacturing employment
and enhance productivity’.
From a statistical point of view, a redefinition of sectors and activities
is needed as soon as manufacturing firms perform services. In contrast,
some firms are outside the manufacturing sector according to official
government statistics but nonetheless are heavily involved in the
production of manufactured goods. Although not actually producing
such goods, how do we classify firms like Apple designing and selling
products without factories? In Chapter 5, Bernard and Fort refer to these
firms as ‘Factoryless Goods Producers’ and document their importance
using US census data.
Bernard and Fort shift the focus outside of manufacturing to examine
the importance of factoryless goods producers, or FGPs for short,
defined as firms classified as part of the wholesale trade sector but that
‘design the goods they sell and coordinate the production activities’.
In their words, these FGPs are ‘manufacturing-like’ in the sense that
they might take a product from the concept through production and
delivery but do not actually engage in the production themselves.
Examples of such companies include Apple, Mindspeed Technologies
(a fabless semiconductor company), and the British appliance firm

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Lionel Fontagné and Ann Harrison

Dyson, which designs and sells innovative vacuum cleaners but does
not manufacture them itself.
The chapter by Bernard and Fort is an important contribution to this
book insofar as there exists little evidence to date about the importance
of these kinds of enterprises. The chapter is also particularly timely as
beginning in 2017 the US Census Bureau will move FGP establishments
to manufacturing. Bernard and Fort estimate that this reclassification of
FGPs would have increased the number of manufacturing employees in
the USA in 2007 by a minimum of 431,000 to a maximum of 1,934,000,
an increase of between 3 and 14 per cent.
While the servitization of firms implies an overly optimistic esti-
mate for manufacturing employment according to Crozet and Milet,
the significance of factoryless goods producers suggests the opposite
in that many wholesalers are engaging in important aspects of the
manufacturing process. Indeed, according to Baldwin, the highest
value-added aspects of manufacturing are captured by these FGPs,
with possible benefits for firm productivity, innovation, and wage
compensation.
Using the US Census Bureau Census of Wholesale Trade, Bernard and
Fort estimate that FGPs accounted for 37 per cent of these establish-
ments in 2002. Bernard and Fort suggest that ‘these results challenge
the stereotype of a wholesale establishment that simply intermediates
between producer and consumers. The wholesale sector is a heteroge-
neous mix of traditional resellers and plants that are actively involved
in production activities.’
The two chapters by Crozet and Milet and Bernard and Fort present
contrasting phenomena: manufacturing firms increasingly engage in
services—which represents ‘hidden de-industrialization’—while part of
the observed de-industrialization is due to sourcing and design activ-
ities performed by factoryless goods producers whose activities were
once done within manufacturing. There is indeed no contradiction
here: the boundaries of the firm—and even more so for multinational
companies—are permanently adjusted to focus on core competencies
(catering is not a core competence for a car maker, but designing new
software might be). Thus the question is what should be internalized,
what can be performed arms-length (Antras 2003), and how produc-
tivity is shaped by this choice (Defever and Toubal 2013). Making
a decision on outsourcing is even more difficult in an international
context: in the presence of incomplete contracts, only the largest and
most efficient firms will benefit from offshoring (Antras and Helpman
2004). All in all, there is nothing like a one-size-fits-all strategy: different
firms, with different productivity levels, working in industries resorting

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Introduction

differently to intangible assets, will make different choices. Some firms

may even contemplate offshoring, but eventually decide against it.
Chapter 6 by Lionel Fontagné and D’Isanto focuses explicitly on
this critical question of what to retain within the firm and what to
outsource or offshore. The chapter presents results from the 2012 survey
of global value chains in fifteen European countries to uncover the main
determinants of international sourcing choices. They focus on a survey
of 28,000 firms located in France, with more than fifty employees
at the end of 2008, belonging to industry, trade, and non-financial
services sectors.
This survey, carried out by the French National Institute of Statistics
and Economic Studies (INSEE) in 2012, is innovative in many aspects.
The questionnaire aimed to uncover the strategic choices made by
firms to either perform activities themselves inside the firm, sourcing in
France, or abroad. One may criticize the joint treatment of domestic and
offshore sourcing, but presenting the questionnaire in that way avoided
focusing on the always sensitive question of offshoring. Offshoring of
an activity was defined as total or partial transfer of this activity to
another firm located abroad, which may, or may not, be part of the
parent’s group.
The survey makes a useful distinction between the core business
activity and the support business activities of the respondents. A core
business activity is usually the firm’s main activity, while support
business activities are carried out by the firm to allow or facilitate the
production of goods or services for the market or for third parties. Six
segments of the value chain were considered beyond the core business
of the surveyed firm: distribution and marketing, sales and after sales
services, ICT services, administrative and management functions from
legal services or accounting to corporate financial and insurance ser-
vices, research and development, and a residual category.
Fontagné and D’Isanto identify reasons why leading firms decide
not to offshore certain activities, and tentatively assess the direct
consequences for employment of French firms’ offshoring strategies.
The survey covered the decision to offshore over a three-year period
between 2009 and 2011. Only 4 per cent of French firms, representing
6.5 per cent of employees in the firms within the scope of the survey,
reported at least one decision to offshore. An additional 3 per cent of
the firms contemplated offshoring, but eventually decided not to. Firms
that chose not to offshore cited as reasons uncertainty about the quality
of goods and services produced in the offshore location, the need for
close interaction with clients, or legal and administrative barriers in the
host country and union problems in the home country.

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Reasons for offshoring, as reported by respondents, are very much in

line with the usual predictions of theories addressing the boundaries
of the multinational firms. Distance (a proxy for transaction and infor-
mation costs, beyond transport) is an important barrier to offshoring.
Also the strategic segments of the value chain, when offshored, are kept
within the firm’s boundaries pointing to the potential for problems
related to incomplete contracts. Offshoring firms are shown to be
different: the larger the firm’s employment, the larger the proportion
of firms that offshored parts of their activity. Similarly, the proportion
of firms that offshore is increasing with the share of exports in their
turnover. For a given sector, size, and firm type, exporters offshored on
average four times more often than non-exporting firms. Larger firms
source to more remote places, where enforcement of contracts can be
more difficult, confirming that in the presence of incomplete contracts,
only the largest and most efficient firms will benefit from offshoring.
Finally, firms that offshore are not only bigger, they are also members
of international groups.
Lastly, Fontagné and D’Isanto estimate that 20,000 jobs (or 0.3 per
cent of employment in the surveyed firms in 2011) were offshored
between 2009 and 2011. This figure, however, takes no account of
general equilibrium effects, and is not based on a proper counter-
factual. This is where surveys, although very informative on certain
decisions (like not offshoring), are intrinsically an incomplete source
of information. Another, less obvious, limitation is worth mentioning:
given the design of the survey performed on behalf of EUROSTAT, the
definition of offshoring used excludes situations where relocations of
activity abroad goes hand-in-hand with an expansion of the activity
at home. Although defining international sourcing as a substitute to
domestic production is restrictive enough to avoid misinterpretation of
the questions by respondents, it neglects more complex strategies where
outsourcing and domestic activity are complements. The measure of
job losses provided in this chapter must accordingly be considered
as indicative, as it excludes by assumption all offshoring activity that
could be complementary with domestic activity.
Fontagné and D’Isanto provide a transition in Chapter 6 from docu-
menting de-industrialization in the North to measuring the implica-
tions for labour markets. The next part of the book shows that de-
industrialization has been accompanied by real costs for industrial
country workers. Those costs take the form of a lower demand for less
skilled workers, rising inequality, negative effects on real wages and
the declining power of unions. It is evident from the chapters in this

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