Kambourov, and Thomas Lemieux for many helpful comments and suggestions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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and Virginia, as well as the Board of Governors. Trefler grateful acknowledges financial support from the Social Sciences and Research Council of Canada (SSHRC). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The "tradability revolution" in services has led to a dramatic expansion of offshore outsourcing of services, allowing firms to take advantage of lower production costs in foreign countries. However, production costs alone cannot explain the location determinants of offshore outsourcing of services. In this paper, we argue that minimizing transaction costs is also an important determinant of the location of offshore outsourcing of services. We empirically analyze characteristics of services and characteristics of foreign countries that may impact on transaction costs in an outsourcing relationship and hence determine where services will be outsourced offshore. We derive measures of service characteristics -routineness, complexity and interactiveness -based on the tasks required to provide them. Further, we posit that there are interaction effects between service and country characteristics. Using Bureau of Economic Analysis data on US service outsourcing across 11 types of services to 31 countries between 1992 and 2005, we find that:(1) services that are more routine, less complex or less interactive are outsourced more to foreign countries; (2) services are outsourced more to countries with higher institutional quality and greater cultural proximity; (3) non-routine, complex and interactive services are outsourced relatively more to countries with a better institutional quality.