Uncertainty in Global Sourcing; Mario Larch (The University of Bayreuth)

Abstract 

We analyse firms’ sourcing decisions under uncertainty about foreign institutions. We find that firms can progressively reduce the prior uncertainty by observing offshoring firms, and thus better assess their offshoring potential. The model characterises a sequential offshoring equilibrium path, led by the most productive firms in the market. In a multi-country setup, we show that information spillovers drive sourcing location choices, leading to multiple equilibria with implications in terms of countries comparative advantages and welfare. Using firm-level data from Colombia, we test the model’s predictions. We follow two reduced-form complementary approaches to test for the determinants of the offshoring choices and for the timing dimension of those decisions. We also derive a structural model that identifies the dynamic trade-off faced by firms when they must decide the location of the intermediate-input suppliers.