Input Sourcing Research Articles

Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters

Using new data on currency invoicing for Belgian firms, we analyze how firms make their currency choice, for both exports and imports, and the implications of this choice for exchange rate pass-through into prices and quantities. We derive our estimating equations from a theoretical framework featuring variable markups, international input sourcing, and staggered price setting with endogenous currency choice. Our structural specification provides a new test of the allocative consequences of nominal rigidities, by estimating the treatment effect of foreign-currency price stickiness on the dynamic response of prices and quantities, controlling for the endogeneity of the firm's currency choice. We show that flexible-price determinants of exchange rate pass-through are also the key firm characteristics that determine currency choice. In particular, small non-importing firms tend to price their exports in euros (producer currency) and exhibit complete exchange-rate pass-through into destination prices at all horizons. In contrast, large import-intensive firms tend to denominate their exports in foreign currencies, especially in the US dollar, exhibiting a lower pass-through of the euro-destination exchange rate and a pronounced sensitivity to the dollar-destination exchange rate. The effects of foreign-currency price stickiness are still significant beyond the one-year horizon, but gradually dissipate in the long run.

Resource Based Capability and Competitive Strategy of High-Tech Ventures in Kerala

The paper examines the impact of resource- based capability and competitive strategy on the performance of high- tech new ventures in Kerala. The resource-based capability was analyzed using the variables managerial capability, technical capability, marketing capability and input sourcing capability of the firm. Competitive strategy was measured by looking into cost strategy, quality strategy, innovation strategy, and customization strategy adopted by the firm. A descriptive research was undertaken to analyze the performance of the ventures. A survey method was administered to collect data from 83 high- tech startups in Kerala. Independent sample t-test, Multiple regression and Cluster analysis were used to arrive at a conclusion. The findings indicate that both resource- based capability and competitive strategy influences the performance of a venture. It was found that the entrepreneurs of profitable ventures exhibit better managerial capability. The results of the cluster analysis show that the entrepreneurs with high performance indicators are customer centric. The innovation strategy and marketing capability adopted by the firm has an impact on the venture performance. The findings suggest that sales, profitability and financial position can be predicted to an extend by the resource- based capability and competitive strategy adopted by the venture. The research work can be used by emerging entrepreneurs, policymakers and incubation managers to develop a framework to improve the performance of startups.

Imported inputs and the gains from trade

This paper characterizes how plant-level heterogeneity in imported input use affects the aggregate welfare gains from trade. Heterogeneous plants choose a fraction of inputs to source from the lowest cost source country, with the rest purchased domestically. Sourcing more inputs requires higher up-front fixed costs, but reduces variable input costs, so import shares are increasing in plant size. Welfare gains are inversely proportional to the general equilibrium elasticity of the aggregate import share with respect to variable trade costs. A standard bilateral gravity regression underestimates this elasticity by not capturing the effects of trade costs on the input sourcing decision. The welfare gains from trade in the model are therefore lower than the gains implied by a gravity-based estimate of the trade elasticity. When calibrated to Chilean plant-level data, this difference is substantial.

Roadways, input sourcing, and patterns of specialization

We propose a model where the internal transport network facilitates the sourcing of intermediate goods from geographically diffuse locations. A denser internal transport network promotes thus the growth of industries that rely on a large variety of inputs. The model shows that heterogeneities in internal transport infrastructures can become a key factor in shaping comparative advantage and specialization. Evidence based on industry-level trade data grants support to the main prediction of the model: countries with denser road networks export relatively more in industries that exhibit broader input bases. We show that this correlation is robust to several possible confounding effects proposed by the literature, such as the impact of institutions on specialization in complex goods. Furthermore, we show that a similar correlation arises as well when the density of the local transport network is measured by the density of their internal waterways, and also when road density is instrumented with measures of terrain roughness.

Trade Liberalization and Indian Manufacturing MSMEs: Role of Firm Characteristics and Channel of Liberalization

We examine the impact of tariff and non-tariff reductions on firm-level gross value of output (GVO) and productivity for various types of Indian manufacturing MSMEs for the 2002–2007 period. We merge the 3rd (2001–2002) and 4th (2006–2007) All India Census data on Indian MSMEs to create a novel dataset that includes micro-enterprises and to calculate input and final goods tariffs, ERPs and NTBs for broad product groups using information from India’s export–import policy, 1997–2003 and 2004–2009. After controlling for firm, industry, state and time-specific factors, we find tariff reductions have improved firm-level GVO and productivity for MSMEs which are technologically upgraded and quality certified. Further, the effects of input tariff reduction exceed those from final goods tariff reductions, i.e., the input sourcing channel is stronger than the final product competition channel. Liberalization of non-tariff barriers is found to have a positive effect on both GVO and productivity growth.

Productivity spillovers through backward linkages: The role of the origin of investors and absorptive capacity of domestic firms

AbstractWe argue that multinationals from different home countries have different technologies and input sourcing behavior. These differences impinge on potential productivity spillovers through backward linkages of multinationals and such effects also differ across host local firms depending on their absorptive capacity. Using a panel of Cameroonian manufacturing firms over the period 1993 to 2005, we find supportive evidence of these arguments. There is a negative relationship between the presence of American and European affiliates in downstream sectors and the productivity of Cameroonian firms in the supplying industries and a positive correlation in the case of Asian affiliates. The absorptive capacity of Cameroonian firms mainly explains these divergent results.

Rules of Origin Liberalization with Multi-Product Firms: Theory and Evidence from Bangladeshi Apparel Exporters

This paper investigates how rules of origin influence firm-level export behavior. Rules of origin specify the minimum amount of local content required for a product to qualify for reduced tariffs under a preferential trade agreement. Rules of origin undermine exporting firms' access to preferential trade agreements in countries where there exist limited opportunities to source intermediate inputs locally. I show that liberalizing rules of origin in a multi-product firm setting not only affects input sourcing decisions and preference utilization rates but also product output mix. I study the 2011 revision to the rules of origin associated with the EU’s Generalized System of Preferences. This revision allowed apparel producers in least-developed countries to use more internationally-sourced content in apparel exports. Using transaction-level data on Bangladeshi apparel firms, and a triple-difference empirical framework, I find the 2011 rules of origin revision resulted in an increase in export revenue, product diversification, export-participation, and product quality. At the industry level, the most productive incumbent firms gained market share after the rules of origin liberalization.

Paving the Way to the Global Marketplace: Highways and Firm Input Sourcing

Paving the Way to the Global Marketplace: Highways and Firm Input Sourcing

The interconnections between services and goods trade at the firm-level

In this paper we study how international trade in goods and services interact at the firm level. Using a rich dataset on Belgian firms for the period 1995–2005, we show that: i) firms are much more likely to source services and goods inputs from the same origin country rather than from different ones; ii) joint imports are associated with higher firm productivity; iii) increases in barriers to imports of goods reduce firm-level imports of services from the same market, and conversely. We build upon a discrete-choice model of goods and services input sourcing that can reproduce these facts to guide our econometric strategy. We use our results to quantify the impact of reductions in goods and services barriers between the US and the EU. Our findings have important implications for the design of trade policy. They suggest that a liberalization of services trade can have direct and sizable effects on goods trade, and vice versa. Moreover, liberalizing goods and services trade jointly brings substantial complementarities.

Measuring Global Value Chains

Recent decades have seen the emergence of global value chains (GVCs), in which production stages for individual goods are broken apart and scattered across countries. Stimulated by these developments, there has been rapid progress in data and methods for measuring GVC linkages. The macro approach to measuring GVCs connects national input–output tables across borders by using bilateral trade data to construct global input–output tables. These tables have been applied to measure trade in value added, the length of and location of producers in GVCs, and price linkages across countries. The micro approach uses firm-level data to document firms’ input sourcing decisions, how import and export participation are linked, and how multinational firms organize their production networks. In this review, I evaluate progress in these two approaches, highlighting points of contact between them and areas that demand further work. I argue that further convergence between these approaches can strengthen both, yielding a more complete empirical portrait of GVCs.

Globalizing the Supply Chain: Firm and Industrial Support for US Trade Agreements

AbstractFrom 1960 to 2000, manufacturing supply chains became global. To what extent has this growth in offshore outsourcing and foreign direct investment affected industrial attitudes toward trade liberalization? Using data on public positions of US firms and trade associations on all free trade agreements since 1990, I show that foreign direct investment (FDI) and input sourcing are theprimarydrivers of support for trade liberalization. Direct import competition and export opportunities play a secondary role in shaping support for free trade agreements. This work therefore adds to the literature on the politics of globalization by providing systematic evidence of a link between global supply chains and industrial preferences, and by developing a new model of the determinants of industrial attitudes toward trade.

Productivity and Firm Boundaries

This paper develops and applies a test of the property rights theory of the firm in the context of global input sourcing. We use the model by Pol Antras and Elhanan Helpman, “Global Sourcing,” Journal of Political Economy, 112:3 (2004), 552-80, to derive a new prediction regarding how the productivity of a firm affects its choice between vertical integration and outsourcing and how this effect depends on the relative input intensity of the production process. The prediction we derive hinges on less restrictive assumptions than industry-level predictions available in existing literature and survives in more realistic versions of the model featuring multiple suppliers and partial vertical integration. We present robust firm-level evidence from Spain showing that, in line with our prediction, the effect of productivity works more strongly in favor of vertical integration, and against outsourcing, in more headquarter-intensive industries.

Building Inventory and Refurbishment Scenario Database Development for Switzerland

SummaryMaterial usage and the related embodied environmental impact have grown in significance in the built environment. Therefore, cities and governments need to develop strategies to reduce both the consumption of resources during usage phase as well as the embodied impact of the current building stock. This article proposes a new component‐based building inventory database as a basis to develop such strategies using building stock modeling. The developed database clusters the building stock according to building typology (single‐family houses, multifamily houses, and office buildings), age, and the main construction systems of the different building components. Based on the component makeup, it lists the necessary material input and waste output for different refurbishment options for each building component. The advantages of the proposed database structure are shown based on two applications for the developed database for Switzerland. The component‐based database allows optimization of refurbishment strategies not only from an energetic perspective, but also with respect to materials, both on the input (sourcing of materials) and the output (waste streams) level. The database structure makes it possible to continuously extend the data set by adding new refurbishment options or add data such as component‐specific lifetimes, costs, or labor intensities of the refurbishment options. In combination with an aligned economic model, this would give an even more holistic view, impact, and feasibility of different refurbishment scenarios both in environmental and economic terms.

From global start-ups to the borderless firm: Why and how to build a worldwide value system

Although the original concept of international new ventures included the geographic configuration of value activities, the subsequent development of the literature has gradually abandoned the concern about the geographic configuration of both input sourcing and output marketing to concentrate almost exclusively on the latter. Therefore, this paper argues that there is a need to re-focus the research so as to figure out how and why some companies are borderless. Borderless firms are defined as the result of the combination, early on, of geographically dispersed resources and capabilities, defying the home-base logic. A borderless firm presents the following characteristics (or a combination of them) from inception (or shortly thereafter): (i) value-added activities dispersed across different countries and regions; (ii) entrepreneurs not bounded by a home base; (iii) multinational founders and/or management teams; and (iv) a multinational workforce. To enquiry into this issue, the study uses five case studies of borderless firms. The results advance the understanding of the motives and processes behind the development, early on, of a borderless configuration of value activities.

Dynamics in Input Sourcing

This explores the dynamics of intermediate input sourcing using the confidential U.S. customs trade data from the U.S. Census. I document three key empirical facts on sourcing dynamics, and explain them using a model on supplier uncertainty and learning. I find first that new suppliers have high entry and exit rates, and second, they are given lower shares on average than incumbent suppliers. Third, over time, suppliers' shares tend to converge to an equal level. To explain these facts, I test the two key empirical implications from the Rauch and Watson model. First, supplier uncertainty leads to small orders to new suppliers, and second higher search cost leads to longer relationships. I find evidence consistent with the model and hypothesis of learning.

Multinationals, Offshoring, and the Decline of U.S. Manufacturing

We provide three new stylized facts that characterize the role of multinationals in the U.S. manufacturing employment decline, using a novel microdata panel from 1993-2011 that augments U.S. Census data with firm ownership information and transaction-level trade. First, over this period, U.S. multinationals accounted for 41% of the aggregate manufacturing decline, disproportionate to their employment share in the sector. Second, U.S. multinational-owned establishments had lower employment growth rates than a narrowly-defined control group. Third, establishments that became part of a multinational experienced job losses, accompanied by increased foreign sourcing of intermediates by the parent firm. To establish whether imported intermediates are substitutes or complements for U.S. employment, we develop a model of input sourcing and show that the employment, impact of foreign sourcing depends on a key elasticity of firm size to production efficiency. Structural estimation of this elasticity finds that imported intermediates substitute for U.S. employment. In general equilibrium, our estimates imply a sizable manufacturing employment decline of 13%.

Import competition from and offshoring to low-income countries: Implications for employment and wages at U.S. domestic manufacturers

Using confidential linked firm-level trade transactions and census data between 1997 and 2012, we provide new evidence on how American firms without foreign affiliates adjust employment and wages as they adapt to import competition from low-income countries. We provide stylized facts on the input sourcing strategies of these domestic firms, contrasting them with multinationals operating in the same industry. We then investigate how changes in firm input purchases from low-income countries as well as domestic market import penetration from these sources are correlated with changes in employment and wages at surviving domestic firms. Greater offshoring by domestic firms from low-income countries correlates with larger declines in manufacturing employment and in the average production workers’ wage. Given the negative association, however, the estimated magnitudes are small, even for a narrow measure of offshoring that includes only intermediate goods. Import penetration of U.S. markets from these sources is associated with relatively larger changes in employment for arm’s length importing firms, but has no significant correlation with employment changes at firms that do not trade. Given differences in the degree of both offshoring and import penetration, we find substantial variation across industries in the magnitude of changes associated with low-income country imports.

Global Sourcing and Domestic Production Networks

This paper studies how firms’ offshoring decisions shape a country’s domestic production net- works. We develop a model in which heterogeneous firms source inputs from multiple industries located in different domestic regions and foreign countries. Input sourcing entails communication with suppliers, which is endogenously increasing in the differentiation of inputs. The model predicts that firms are less likely to source differentiated inputs, especially from distant domestic and foreign suppliers, due to costly communication. Triggered by foreign countries’ export supply shocks, firms start offshoring inputs from foreign suppliers, which displace the less productive domestic suppliers in the same industry (the direct displacement effect). The resulting decline in marginal costs induces firms to start sourcing from the more productive and distant domestic suppliers within industries (the within-industry restructuring effect), but possibly also from nearby suppliers that produce inputs that are more differentiated than those supplied by existing suppliers (the industry composition effect). The net effect of offshoring on a firm’s domestic production networks depends on the relative strength of the three effects, which we verify using data for 4.5 million buyer-seller links in Japan. Based on a firm-level instrument, we find that after offshoring, firms are less likely to drop suppliers on average, but more so for the larger ones. They tend to add nearby suppliers producing differentiated inputs. These results suggest that firms.offshoring may increase the spatial concentration of domestic production networks.

Strategic Perils of Outsourcing: Sourcing Strategy and Product Positioning

Although outsourcing input production has long been considered as an important approach to help downstream manufacturers enhance structural efficiency, we provide a theoretical explanation for why outsourcing may negatively affect downstream firms' profitability. We consider a duopoly model wherein downstream manufacturers endogenously determine their input sourcing and product positioning strategies. We show that when inputs from outside suppliers are not perfectly compatible with downstream manufacturers' requests, outsourcing causes downstream manufacturers to pursue aggressive product positioning behavior, leading to the prisoner’s dilemma --- even though both downstream manufacturers could be better off producing inputs in-house, they may still choose outsourcing.

Vertical Foreign Direct Investment: Make, Sell and (Not) Buy

According to conventional wisdom, multinational firms undertake vertical FDI in order to take advantage of cross-border factor cost differences and source the inputs from abroad at better terms. Recent empirical findings though document that this is not always the case. We provide theoretical support to the latter by demonstrating that when there is transfer of intangible assets between a multinational’s vertically related production plants, its parent firm can engage in vertical FDI in order to improve its cross-threat and its input sourcing terms domestically and not abroad as well as in order to exploit its intangible assets in another country. We also investigate the effects of trade liberalization and the welfare consequences of vertical FDI.