The determinants of service imports: The role of cost pressure and financial constraints

This study provides evidence on how German multinational firms have restructured their service activities around the recent crisis. Making use of new micro-level data on service imports of German multinationals from 2002-2008, we assess the determinants of service offshoring along the extensive and intensive margins. In particular, we evaluate how internal frictions in terms of a sharp drop in the sales level (per employee) and external frictions in terms of a reduced availability of credit co-determine the likelihood and the extent of sourcing services from abroad. First, we find that firms are less likely to start to import services from abroad if they are under cost pressure. By contrast, firms intensify existing service imports linkages in times of a sales drop. Second, financial constraints, which played a major role for the goods trade during the crisis, did not have any significant effect on service imports. These results are in line with the argument that the generally observed crisis-resilience of service trade stems from increased pressures to save on variable costs through offshoring and from its lower dependence on external finance. Furthermore, and in line with our argument, we find that a decline in sales and labor productivity induces firms to sort into intra-firm rather than arm's-length trading.