Do Contractual Frictions Shape Global Sourcing? Evidence from Spanish Firm-Level Data

We investigate Spanish manufacturing firms’ global sourcing decisions with regard to their ownership structure and their locational choice of intermediate input production by exploring a firm-level panel data set covering the years 2000-2007. We distinguish four sourcing categories (foreign integration, foreign outsourcing, domestic integration, domestic outsourcing) thus providing a much more comprehensive picture about the global production organization than was the case with earlier studies. Our findings are: first, there is a crucial interplay between a firm’s capital intensity and total factor productivity which is shaping the probability of integrating intermediate input production into the firm boundaries of control, both at home and abroad. In particular, a productivity-increase yields significantly higher probabilities of sourcing inputs from a vertically integrated supplier if and only if the firm’s capital intensity lies above a well-identified cut-off intensity level. Second, as regards the locational choice of production organization, offshoring firms are on average more capital-intensive than purely domestic firms, which suggests that there remain unexplored channels through which the factor content of production affects the firms’ global sourcing decisions. Third, there is a productivity-dependent sorting pattern of firms into the four sourcing categories according to which foreign-integration firms feature the highest and domestic-outsourcing firms the lowest total factor productivity. There is also evidence that foreign-outsourcing firms are slightly more productive than domestic-integration firms.