Greasing the Wheels of International Commerce:How Services Facilitate Firms’ International Sourcing

We use unique plant-level data to study the link between the local availability of services andthe decision of manufacturing firms to source materials from abroad. To guide our empiricalanalysis we develop a monopolistic-competition model of the materials sourcing decisions ofheterogeneous firms. The model generates predictions about how the intensity ofinternational sourcing of materials depends on a firm’s productivity and the availability of localservices. These predictions are supported by the data. We find evidence that moreproductive manufacturing firms tend to have a higher ratio of imported materials to sales. Inaddition, we find evidence that services grease the wheels of international commerce: Agreater availability of services across regions, industries and time increases a firm’s foreignsourcing of materials relative to sales. Interestingly, this positive impact of local serviceavailability on imports especially applies to stand-alone firms that, unlike multinationals, areless likely to rely on imported or internally provided services....