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Global Sourcing and Domestic Production Networks

Author

Listed:
  • FURUSAWA Taiji
  • INUI Tomohiko
  • ITO Keiko
  • Heiwai TANG
Abstract
This paper studies how firms' offshoring decisions shape a country's domestic production networks. 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 displaces 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 (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.

Suggested Citation

  • FURUSAWA Taiji & INUI Tomohiko & ITO Keiko & Heiwai TANG, 2018. "Global Sourcing and Domestic Production Networks," Discussion papers 18004, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:18004
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    2. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
    3. Emmanuel Dhyne & Ayumu Ken Kikkawa & Magne Mogstad & Felix Tintelnot, 2021. "Trade and Domestic Production Networks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(2), pages 643-668.
    4. Alfaro-Urena, Alonso & Manelici, Isabela & Vasquez, Jose P, 2019. "The Effects of Multinationals on Workers: Evidence from Costa Rica," Institute for Research on Labor and Employment, Working Paper Series qt51r419w9, Institute of Industrial Relations, UC Berkeley.
    5. Ana P. Fernandes & Heiwai Tang, 2020. "How Did the 2003 SARS Epidemic Shape Chinese Trade?," CESifo Working Paper Series 8312, CESifo.
    6. Cheng Chen & Tatsuro Senga & Hongyong Zhang, 2021. "Measuring business-level expectations and uncertainty: survey evidence and the COVID-19 pandemic," The Japanese Economic Review, Springer, vol. 72(3), pages 509-532, July.
    7. Endoh, Masahiro, 2022. "The impact of firms’ international trade on domestic suppliers: The case of Japan," Journal of the Japanese and International Economies, Elsevier, vol. 63(C).
    8. Paulo Bastos & Joana Silva & Eric Verhoogen, 2018. "Export Destinations and Input Prices," American Economic Review, American Economic Association, vol. 108(2), pages 353-392, February.
    9. Emmanuel Dhyne & Ayumu Ken Kikkawa & Glenn Magerman, 2022. "Imperfect Competition in Firm-to-Firm Trade," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 1933-1970.
    10. Antrà s, Pol & Chor, Davin, 2021. "Global Value Chains," CEPR Discussion Papers 15908, C.E.P.R. Discussion Papers.
    11. Lafond, François & Astudillo-Estévez, Pablo & Bacilieri, Andrea & Borsos, András, 2023. "Firm-level production networks: what do we (really) know?," INET Oxford Working Papers 2023-08, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    12. Masahiro Endoh, 2020. "The Impact of Firms' International Trade on Domestic Suppliers," Keio-IES Discussion Paper Series 2020-016, Institute for Economics Studies, Keio University.
    13. Kono, Tatsuhito & Nakajima, Kentaro & Ozane, Kanta, 2023. "Quantitative Impact Analysis of the Centralization of Firms in the Tokyo Metropolitan Area Considering Firm-to-Firm Trade Networks," MPRA Paper 117594, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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