Foreign Sourcing and Productivity: Evidence at the Firm Level

The objective of this paper is to explore the relationship between foreign sourcing and productivity at the firm level. To organise the empirical work, we rely on Antràs and Helpman’s model (2004), which predicts that high‐productivity firms engage in trade (foreign sourcing) and low‐productivity firms do not source abroad. The paper performs productivity comparisons between groups of firms sourcing abroad and firms which do not source abroad, applying non‐parametric procedures to a sample of Spanish manufacturing firms. Our results indicate the existence of large and significant differences in productivity between firms that source abroad and those that do not. The productivity premium of foreign sourcing firms is robust to other characteristics that are associated with firm productivity. Furthermore, the evidence reported is consistent with self‐selection of the most productive firms into the practice of sourcing abroad. The ex ante productivity distribution of firms that engage in foreign sourcing stochastically dominates the distribution of firms which do not source abroad. Finally, our estimates suggest that changing the intensity of foreign sourcing is a technology shifter for firms, and this has a direct impact on their total factor productivity.