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We present a two-country heterogeneous firm model in which firms have the (costly) opportunity to offshore intermediate inputs with different factor intensities. The skill (capital)-abundant country’s high-productivity firms offshore a larger range of labor-intensive inputs than low-productivity firms to the labor-abundant country. This leads to an endogenous positive correlation between firm productivity and skill (capital) intensity as suggested by empirical evidence on high- and middle-income countries. Using French firm-level data, we find empirical support for a number of the model’s predictions: (i) More productive firms are more likely to offshore. (ii) More productive (larger) firms offshore a larger number of intermediates and a larger volume of intermediate inputs. (iii) The skill (capital) intensity of imports is positively correlated with firm productivity. (iv) Importers of intermediate inputs are more skill (capital) intensive. (v) There is a positive relationship between the skill (capital) intensity of intermediate inputs offshored by a firm and the skill (capital-labor) ratio it employs. Finally, we also show that the within-industry variation in factor intensities is more important than its between-industry counterpart.
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