Working Paper: CEPR ID: DP10310
Authors: Pol Antràs; Teresa C. Fort; Felix Tintelnot
Abstract: This paper studies the extensive and intensive margins of firms' global sourcing decisions. We develop a quantifiable multi-country sourcing model in which heterogeneous firms self-select into importing based on their productivity and country-specific variables. The model delivers a simple closed-form solution for firm profits as a function of the countries from which a firm imports, as well as those countries' characteristics. In contrast to canonical models of exporting in which firm profits are additively separable across exporting markets, we show that global sourcing decisions naturally interact through the firm's cost function. In particular, the marginal change in profits from adding a country to the firm's set of potential sourcing locations depends on the number and characteristics of other countries in the set. Still, under plausible parametric restrictions, selection into importing features complementarity across markets and firms' sourcing strategies follow a hierarchical structure analogous to the one predicted by exporting models. Our quantitative analysis exploits these complementarities to distinguish between a country's potential as a marginal cost-reducing source of inputs and the fixed cost associated with sourcing from this country. Counterfactual exercises suggest that a shock to the potential benefits of sourcing from a country leads to significant and heterogeneous changes in sourcing across both countries and firms.
Keywords: complementarities; extensive margin; global sourcing; heterogeneous firms; importing; productivity
JEL Codes: C63; D21; D22; F12; F23; F61; L11; L16; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Addition of a country (F29) | Lower variable costs (D21) |
| Addition of a country (F29) | Increased sales (M31) |
| Shock to potential benefits of sourcing from a country (F35) | Changes in sourcing across countries and firms (F23) |
| Changes in sourcing potential (F69) | Changes in firm behavior and market outcomes (D21) |