Working Paper: NBER ID: w22550
Authors: Teresa C. Fort
Abstract: This paper provides direct empirical evidence on the relationship between technology and firms' global sourcing strategies. Using new data on U.S. firms' decisions to contract for manufacturing services from domestic or foreign suppliers, I show that a firm's adoption of communication technology between 2002 to 2007 is associated with a 3.1 point increase in its probability of fragmentation. The effect of firm technology also differs significantly across industries; in 2007, it is 20 percent higher, relative to the mean, in industries with production specifications that are easier to codify in an electronic format. These patterns suggest that technology lowers coordination costs, though its effect is disproportionately higher for domestic rather than foreign sourcing. The larger impact on domestic fragmentation highlights its importance as an alternative to offshoring, and can be explained by complementarities between technology and worker skill. High technology firms and industries are more likely to source from high human capital countries, and the differential impact of technology across industries is strongly increasing in country human capital.
Keywords: technology; production fragmentation; global sourcing; contract manufacturing services
JEL Codes: F14; F23; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Communication technology adoption (L96) | Probability of fragmentation (F12) |
| Communication technology adoption (L96) | Fragmentation costs (F12) |
| Industry CAD intensity (L69) | Effect of technology on fragmentation (F12) |
| Industry CAD intensity (L69) | Probability of foreign sourcing (F23) |
| Communication technology adoption + Industry CAD intensity + Country human capital (L63) | Differential impact of networks (D85) |
| Technology (L63) | Domestic fragmentation as alternative to offshoring (F12) |