Global Sourcing and Domestic Production Networks

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Information about Global Sourcing and Domestic Production Networks

Published on July 12, 2016

Author: Structuralpolicyanalysis


1. Global Sourcing and Domestic Production Networks TaijiFURUSAWA(HitotsubashiUniversity) TomohikoINUI(GakushuinUniversity/RIETI) KeikoITO(SenshuUniversity/OECD) HeiwaiTANG(JohnsHopkinsUniversity) 2016 CONFERENCE OF THE GLOBAL FORUM ON PRODUCTIVITY Structural Reforms for Productivity Growth 7 – 8 July, 2016 Tivoli Lisboa Hotel Lisbon, Portugal 1

2. The state of firm-level analysis of GVC • Most research on global value chain (GVC) focuses on their international segments (the decomposition of foreign value added). • The literature has so far given relatively little attention to the domestic segment of a GVC in a country. • Who is trading with whom in the domestic economy? How are the buyer-supplier relationships affected by global sourcing? • The large and growing literature (e.g., Antràs, Fort, and Tintelnot 2014) has taken an important step to study the patterns of global sourcing, but the focus is still about the firm that offshores. 2

3. Contributions • Study both theoretically and empirically how firm’s global sourcing affects choices of domestic suppliers and thus reshapes domestic production networks. • Pattern of both domestic and foreign sourcing • The model features “two-sided heterogeneity” in efficiency across both buyers and sellers. • Consider inter-firm transaction costs that vary across different types of inputs: The specificity of the inputs to the buyer’s production (Relation Specificity) • Use exhaustive production network data (4.5 million buyer- supplier relationships) for Japanese firms to examine the model predictions. • Try to reveal the causal effects of offshoring on domestic sourcing patterns. 3

4. Distance and the number of sellers 1 10 100 1000 10000 500000 5 25 125 625 3125 distance km 4

5. Distance and the number of sellers (Differentiated input industries)1 10 100 1000 10000 500000 5 25 125 625 3125 distance km Differentiated (Rauch=1) Not-differentiated (Rauch=0) 5

6. Theoretical model: Set-up Ex ante offshoring Offshoring cost reduction  Start offshoring Drop inefficient suppliers Production cost reduction  More profit Pay fixed cost to search suppliers in a new region Add new suppliers Firm Region Distance Cost Technology RS Productivity 6

7. Theoretical model: Predictions • Firms will only source inputs to some regions. Fixed cost to look for a supplier in each region • More productive firms will source inputs to more regions. (Antras et al. 2014) Only productive firms are profitable after paying the fixed search costs. • Firms source inputs to a large mass of firms to closer regions. The more distant suppliers are on average more productive. (Bernard et al. 2015) • The greater fraction of inputs are insourced and outsourced to closer regions for more relation specific inputs. Firms need to invest in communication with the supplier. Communication costs are higher for inputs sourced from a more distant region. 7

8. Predictions – Offshoring and firms’ domestic production network • More productive firms • And generic (less-relation specificity) inputs. Offshoring is more likely for • Source to more distant domestic regions and suppliers • Drop the least efficient firms in all other domestic suppliers • Reduces insourcing The offshoring firm will 8

9. Data (1) • Data from the Tokyo Shoko Research, Ltd. (TSR) • Basic firm-level balance sheet info of over 800,000 firms in Japan for 2005 and 2010. • Employment, sales, location, up to three main industries (4-digit), establishment year, number of factories. • Info on between-firm relationships: the names of a firm’s main suppliers (up to 24), buyers (up to 24), and shareholders. • The top seller in our constructed Japanese production network has over 11,000 buyers in 2010; the top buyer has close to 8,000 suppliers 9

10. Data (2) • Firm-level data from Basic Survey on Business Structure and Activities (BSBSA), Japan’s Ministry of Economy, Trade and Industry (METI) • All firms with at least 50 employees or 30 million yen of paid-in capital in the Japanese manufacturing, mining, wholesale and retail, and several other services sectors. • 22,939 and 24,892 firms in 2005 and 2010, respectively. • Detailed information on firm’s business activities including exports and imports • As we focus on offshoring, we analyse only manufacturing buyers included in BSBSA and their suppliers whose information is taken from TSR. • Our dataset contains manufacturing buyers with 50+ employees and their suppliers in all the industries. 10

11. 0 10 20 30 40 50 60 70 Import Starters 2005-2010 Non-Importers 2005-2010 Continuous Importers 2005-2010 Average number of suppliers per buyer 11

12. Measures for Relation-Specificity at the supplier-sector level • Differentiated goods sector or non-differentiated goods sector (Rauch 1999) • Inverse of input elasticity (Broda and Weinstein 2006) • Agglomeration (Ellison, Glaeser, Kerr 2010) 12

13. Main findings (1) The pattern of domestic and foreign sourcing (Antràs et al. 2014, Bernard et al. 2015) • Ex ante more productive firms are more likely to offshore; Ex post, offshoring makes firms more productive. • More productive firms source inputs from more suppliers over wider and more distant regions. Relation specificity between buyers’ and sellers’ (industries) matters: • Firms are less likely to source relation-specific inputs to distant suppliers. • Less likely to source them to a foreign supplier. 13

14. Main findings (2) The impact of global sourcing on domestic production networks: • Offshoring causes churning of domestic buyers and suppliers: the net effect on the number of domestic suppliers is positive.  Expand supplier scope (more suppliers, more regions, more sectors) • More likely to drop larger and generic input suppliers • Distant suppliers are less likely to be added. • These choices of suppliers reduces the average distance of outsourcing, strengthening agglomeration. 14

15. Summary and policy implication Generic input suppliers are likely to be dropped and added. Buyers’ global sourcing is less likely to have detrimental effects on domestic generic inputs suppliers. Offshoring promotes buyers’ search for new regions. Efficient buyers and supplies are likely to increase links. Domestic networks will be more efficient. Offshoring firms drop and add more than non-offshorers. Add>Drop Less drop/add for RS inputs Policies to lower search costs / reduce info. frictions Remove disincentives for firms to expand production scale 15

16. Thank you and commentswelcome! 16

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