Banque de France.

How well does the theory of the firm explain the choice between intrafirm vs arms ’ length trade? Using import data from France we examine firm, country and product determinants of intrafirm imports at both the extensive (sourcing mode choice) and intensive (value of imports for a given mode) margin. By examining the extensive margin we find support for three key predictions of the property-rights approach. Intrafirm imports are more likely: (i) in capital-, skill-, and headquarter services-intensive firms; (ii) in highly productive firms; (iii) from countries with well-functioning judicial institutions. On the other hand, we find that complex inputs are more likely to be sourced within firm boundaries which can be rationalized within the transaction-cost approach. We also find that earlier industry- and product-level findings can be misleading, because some of these are driven by the intensive margin (on which theory is silent), and because of strong hidden within-sector heterogeneity in key covariates