Trust your neighbour. Spatial agglomeration, social capital and outsourcing

Relying on a unique dataset on machine-tool small firms located in Emilia Romagna, Italy, we estimate the separate effect of technological relatedness and social capital on the propensity to fully or partially outsource production activities. We focus on a series of 29 production phases, for which we know if they have been operated in-house or outside the firm. Once controlled for endogeneity, we find that: (i) full outsourcing is positively related to social capital, but this effect vanishes as the technological relatedness with neighbouring firms increases; (ii) firms engage in concurrent sourcing only when neighbouring firms are highly technologically related. The phase-estimates show that: (iii) while social capital does matter for the full outsourcing of core activities, high technological relatedness is relevant for the full outsourcing of peripheral ones; (iv) no significant effect of technological relatedness and social capital emerges for the concurrent sourcing of both core and peripheral activities.