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THE MARGINS OF GLOBAL SOURCING: THEORY AND EVIDENCE FROM U.S. FIRMS

December 2014

Working Paper Number:

CES-14-47

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.

Document Tags and Keywords

Keywords Keywords are automatically generated using KeyBERT, a powerful and innovative keyword extraction tool that utilizes BERT embeddings to ensure high-quality and contextually relevant keywords.

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:
market, production, cost, substitute, import, export, monopolistic, produce, good, exporting, exporter, multinational, foreign, importing, country, profit, revenue, gdp, supplier, trading, importer, custom, sourcing, firms import, exporting firms

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:
Center for Economic Studies, Ordinary Least Squares, National Bureau of Economic Research, Longitudinal Business Database, World Bank, Retail Trade, Michigan Institute for Teaching and Research in Economics, Wholesale Trade, NBER Summer Institute

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