Service Imports, Workforce Composition, and Firm Performance: Evidence from Finnish Microdata

Abstract

This paper uses unique Finnish firm-level micro data on service imports, employment, and firm characteristics to examine changes in workforce composition and performance of Finnish service importers during a period of a significant increase in service imports (2002-2012). We utilize world service export supply shocks, which we allocate to firms based on their highly specialized service input structure, as an instrument to identify the impact of sourcing services from abroad. We find that firms that increase imports of service inputs reduce employment of workers in occupations with low and medium skills, increase employment of managers and high-skilled professionals, and experience increased productivity, sales, and assets. Our results suggest that the effects of importing service inputs are broad: they involve workers beyond low-skilled occupations and firms across manufacturing and service sectors. Finally, we estimate the potential welfare gains associated with the observed increase in imports of services to be sizeable and larger than the estimated welfare gains from increased trade in goods during the same period.

Keywords: service imports, employment, firm performance