Greasing The Wheels Of International Commerce: How Services Facilitate Firms' International Sourcing

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.