Heiwai Tang from JHU SAIS will present "Global Sourcing and Reorganization of Domestic Supply Chains".
This paper studies how firms' global input sourcing 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 result in lower marginal costs and thus higher variable profits. The scale effect of offshoring induces firms to start sourcing inputs from the more productive and distant domestic suppliers within industries, but also from nearby suppliers in the more differentiated industries. The net effect of offshoring on the spatial structure of a firm's domestic production networks will depend on the relative strength of the two 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 but more likely to add domestic suppliers, especially those located closer to the buyer than the existing ones and from the more differentiated industries. These results suggest that firms' offshoring may increase the geographic concentration of domestic production networks.