Total factor productivity in Italian manufacturing: does location matter?

Abstract

This paper investigates the sluggish, or falling, productivity of Italian manufacturing firms which began in the mid-90s and carried on well into the Two Thousands, to recover slowly only in 2013-19. While there is general consensus on the main determinants of Italian firms’ sluggish performance -- failure to adopt the ITC revolution, rigidities -- less attention has been devoted to the spatial aspects of the problem. Starting from firm-level data, the paper estimates total factor productivity (henceforth TFP) for over 190,000 Italian manufacturing firms during 2008-20. TFP is estimated with reference to the method suggested by Olley Pakes (1996). The estimated TFP is then aggregated with reference to Italy’s NUTS-3 provinces, and to the Ateco manufacturing breakdown. The presence of clubs is identified by means of the dynamic, nonlinear factor model developed by Philips Sul (2007, 2009) that allows to identify groupings endogenously. Finally, the relative strength of sectoral specialization against that of geographic location is tested with respect to the creation of clusters.