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The authors use unique plant-level data to study the link between the local availability of services and the decision of manufacturing firms to source materials from abroad. To guide their empirical analysis they develop a monopolistic-competition model of the materials sourcing decisions of heterogeneous firms. The model generates predictions about how the intensity of international sourcing of materials depends on a firm's productivity and the availability of local services. These predictions are supported by the data. They find evidence that more productive manufacturing firms tend to have a higher ratio of imported materials to sales.
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