The Margins of Global Sourcing: Theory and Evidence from US Firms

TLDR

Unlike canonical export models with additively separable profits, global sourcing decisions interact through the firm’s cost function. The study develops a quantifiable multi‑country sourcing model in which firms self‑select into importing based on productivity and country‑specific variables. The authors exploit complementarities in sourcing decisions to solve the firm’s problem and estimate the model. The model reveals that selection into importing exhibits complementarities across source markets, and counterfactual predictions show that interdependencies generate heterogeneous domestic sourcing responses to trade shocks. JEL codes: D24, F14, F23, L14, L21.

Abstract

We develop a quantifiable multi-country sourcing model in which firms self-select into importing based on their productivity and country-specific variables. In contrast to canonical export models where firm profits are additively separable across destination markets, global sourcing decisions naturally interact through the firm's cost function. We show that, under an empirically relevant condition, selection into importing exhibits complementarities across source markets. We exploit these complementarities to solve the firm's problem and estimate the model. Comparing counterfactual predictions to reduced-form evidence highlights the importance of interdependencies in firms' sourcing decisions across markets, which generate heterogeneous domestic sourcing responses to trade shocks. (JEL D24, F14, F23, L14, L21)