The ladder of foreign sales: Internationalization modes of European firms

This paper show evidence that firms choose from a much larger set of internationalization modes than usually assumed in the international trade literature and that this choice is governed by similar selection processes than the one proposed by Helpman, Melitz, Yeaple (2004 AER). We rely on a unique dataset of European firms which, besides balance sheet and many qualitative variables, includes direct information on indirect and direct exporting, outsourcing, service and manufacturing FDI and operating business groups. We generalize a model of self-selection based on two dimensional firm heterogeneity productivity and quality - to N trade modes. By estimating this model we find evidence supporting selection into many modes, and learn that both quality and productivity play a similarly important role. The model is also suitable to inform us about the relative cost structure of different modes: indirect exporting does not seem to require a high fixed cost, while the fixed cost of FDI is much larger than that of exporting or outsourcing. We also find that when we focus on independent firms that are not part of vertical investment strategies which are firms usually considered in selection models -, results hold, albeit with lower estimated premia.