Abstract
Service inputs are a key component of export costs that help to explain the process of internationalization of firms. A new dataset on the participation of French firms in global value chains reveals that firms with longer export experience are more likely to source service inputs from the same market. We rationalize this fact in a model where firms are initially uncertain about their export profitability, but learn it as they keep selling abroad. Due to higher sunk costs compared to sourcing domestically, some firms decide to offshore only when they become sufficiently confident about their export prospects, after gaining enough export experience. This effect holds for any given level of firm productivity, and is larger in more uncertain markets and when there are higher frictions in sourcing services domestically. In turn, offshoring firms display less volatility and are less likely to exit foreign markets. Leveraging our novel dataset, we provide strong empirical support for each ofthese predictions.
Local Organizer: Giovanni Angelini & Stefano Bolatto