Innovativeness, offshoring and black economy decisions. Evidence from Italian manufacturing firms

• We study three possible strategies for Italian manufacturing firms: innovating, offshoring, entering black economy.
• We do this in the peculiar context of Italy, the G-7 country with the largest share of the black economy in GDP.
• We find that offshoring firms are larger, more innovative, and have a higher capital/labour ratio.
• Moreover, they are located in provinces with a lower share of shadow economy.
• Firms entering the black economy may be producing negative spillover effects by lowering the propensity to innovate.

Following recent models in international trade this paper examines the characteristics that businesses should possess to pursue internationalization strategies. We do this in the peculiar context of Italy, the G-7 country with the largest share of the black economy in GDP. Specifically, we posit that Italian manufacturing firms may use three strategies to counter the competitive threats by emerging economies: (i) improve the innovative content of their products (ii) venturing into offshoring, or, alternatively, (iii) entering the black economy. We estimate the impact of these moves with firm-level data drawn from two waves of the Italian Manufacturing Survey (IMS) covering a six-year period (1998–2003). We find that offshoring firms are larger, more innovative, have higher capital/labour ratio and are located in provinces where the share of the black economy is lower. Firms belonging to provinces in which the share of the black economy is larger are less likely to choose the internationalization mode. The offshoring-black economy nexus bears relevant policy implications. In particular, vis-à-vis their offshoring companions, firms choosing to enter the black economy may be producing negative spillover effects by lowering productivity and the propensity to innovate.