The Margins of Global Sourcing: Theory and Evidence from US Firms

Abstract

We develop a quantifiable multi-country sourcing model in which firms self-select into importing based on their productivity and country-specific variables. In contrast to canonical export models where firm profits are additively separable across destination markets, global sourcing decisions naturally interact through the firm's cost function. We show that, under an empirically relevant condition, selection into importing exhibits complementarities across source markets. We exploit these complementarities to solve the firm's problem and estimate the model. Comparing counterfactual predictions to reduced-form evidence highlights the importance of interdependencies in firms' sourcing decisions across markets, which generate heterogeneous domestic sourcing responses to trade shocks. (JEL D24, F14, F23, L14, L21)

Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks *

“…We show that switching costs between trade partners are substantial and can explain the propagation of shocks in networks of nonfinancial firms. The existence of costs of searching for suppliers is a key parameter in recent studies of firms' sourcing decisions (Antrà s, Fort, and Tintelnot 2014;Bernard, Moxnes, and Saito 2014). Our findings suggest that these costs can be large in the short run.…”

Brands in Motion: How Frictions Shape Multinational Production

“…It combines a CES heterogeneous-firm product market structure as in Melitz (2003) with a constant-elasticity sourcing decision adapted from Eaton and Kortum (2002). Important contributors to the development of this framework include Ramondo (2014), Ramondo and Rodríguez-Clare (2013), Irarrazabal et al (2013), Arkolakis et al (2013), Antras et al (2017), and (closest to our setup) Tintelnot (2017). Comparative statics in these papers generally hinge on two parameters: the first governs substitutability between products from the view of consumers, whereas the second describes the interchangeability of potential production locations from the firm's perspective.…”

“…An important benefit from this extension is to allow for interdependencies in how production and consumer surplus are impacted by shocks to frictions. A central element for tractable estimation of sourcing decisions both in our setup and in the versions of the double CES MP model developed by Tintelnot (2017) and Antras et al (2017) is the CES functional 1 Dekle et al (2007) were the first to use the CES structure of gravity to implement what Costinot and RodriguezClare (2014) call the exact hat algebra (EHA) approach to counterfactuals.…”

“…2 Prior work on multinational production omits the two market entry margins, as Arkolakis et al (2013) assume single-product firms, Antras et al (2017) consider a single market, and Tintelnot (2017) assumes that firms offer a unit mass of varieties in every market. The variety-entry extensive margin for multiple-product firms was incorporated in a pure trade model by Bernard et al (2011).…”

Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade

“…Since effective factor prices, ω ji, t n , are equal to the product of w j, t n and τ ji, t n , an alternative would be to use measures of factor prices, w j, t n , as observable shifters of ω ji, t n , instrumented, for instance, by population: see, e.g., Eaton and Kortum (2002) and Antràs, Fort, and Tintelnot (2016). Though this second approach would allow reduced-form and IV estimates to differ, we view the two approaches as very similar.…”