Managing Export Complexity: the Role of Service Outsourcing

Abstract: This study investigates the determinants of service outsourcing, and professional and business services in particular, an industry that accounts for half of the growth of the total service sector. Drawing on the insights of a model of the boundary of the firm based on adaptation costs and diminishing return to management, I argue that an increase in coordination complexity (i.e. more inputs in the production process) leads firms to outsource a higher share of their total costs and to focus on their core competences. Since country-specific service inputs are needed to export to a particular country (e.g. a specific advertisement campaign), I proxy coordination complexity with the number of export destination markets and I find support for the theory using an extensive dataset of French firms. Over time, firms that export to more countries increase the amount of purchased business services. The finding is quantitatively very significant and robust to firm size, export intensity, internal production, and many other determinants of outsourcing proposed in the literature. The firm-level evidence also contributes to opening the black box of fixed export costs and to establishing a new causal link between globalization and structural transformation exploiting exogenous demand shifters.