Global Sourcing

1
Global Sourcing

• Antras Helpman 2004

2
Overview

• N-S Model
• Final Goods Producers situated in North.
• Choice of location to source inputs
• Equilibrium in which firms with different
  productivity levels choose different ownership
  structures
• Effects of within-sectoral heterogeneity and
  variations in industry on prevalance of
  organizational forms.
• Antràs 2003 with incorporation of heterogeneity a
  la Melitz 2003.

3
Background

• Different ownership models Standard vertical
  integration, FDI, outsourcing abroad, outsourcing
  in domestic country
• Example Intels FDI strategy
• Example Nikes arms-length import strategy
• Powerful role of international specialization
• WTO 1998 Annual Report In the production of an
  American car, 30 of the cars value in Korea,
  17.5in Japan, 7.5 in Germanyonly 37 of
  production value in America!

4
The Model

• representative consumer in each country with
  quasi-linear preferences
• Aggregate consumption in sector j is a CES
  function
• Elasticity of substitution within sector between
  varieties 1/1-Alpha
• Inverse Demand function

5
Technology

• Producers of differentiated goods face a
  perfectly elastic supply of labor.
• wN gt wS
• Monopolistic competition
• As in Melitz (2003), producers needs to incur
  sunk entry costs wN fE, after which they learn
  their productivity ? G (?).
• As in Antràs (2003a), final-good production
  combines two specialized inputs, according to the
  technology

6
Technology

• H final-good producer (agent H), m supplier
  (agent M).
• Sectors vary in their intensity of headquarter
  services
• Within sectors, firms differ in productivity ?
• After observing ?, H decides exit or produce.
• Producing incurs additional fixed costs depending
  on
• k ? V, O and l ? N, S,

7
Contracts

• Incomplete contracts
• dN dS In times of contractual breach,
  Integration in North can recover a higher
  fraction of output.
• The outside option of H under outsourcing is
  zero.
• The outside option of M is zero regardless of
  ownership structure and location.
• Hs profit-maximizing organizational mode will
  also maximize joint profits.

8
Equilibrium

• Profit function
• By choosing k and l, H is chooses triplet (ßlk,
  wl, f lk)
• Profit is decreasing in f and w
• plk is largest when ßlk ß(?)

9
Industry Equilibrium

• Upon observing ?, a final-good producer H chooses
  the ownership structure and the location
  maximizing profit, or exits the industry and
  forfeits the fixed cost of entry wN fE
• j
• Firms with ? ? (X) stay in the industry
• Free entry condition

10
Organizational Forms Trade offs

• Location decision Variable costs are lower in
  the South, but fixed costs are higher there.
• Integration decision Integration improves
  efficiency of variable production when the
  intensity of headquarter services is high, but
  involves higher fixed costs. This decision will
  depend on ?, but also on ?.

11
Component Intensive Sector

• This implies ?O (?) gt ?V (?) for l N, S, which
  together with the fixed costs ordering implies
  that any form of integration is dominated in
  equilibrium.

12
Headquarter Intensive Sector

• All four organizational forms exist in
  equilibrium

13
Relative Prevalence

• Relative prevalence is measured by the share of
  products produced in various organizational forms
  (V or O, in N or S).
• Distribution
• sMO the fraction of active firms that outsource
  in country l in the component-intensive sector.
• Then
• Substituting for the cutoffs yields

14
Relative Prevalance Component-intensive

• Decline in Southern wage rate?
• Fall in Transport costs?
• Increase in dispersion of productivity?

z
15
Relative Prevalance Headquarter-intensive

• A fall in the relative wage in the South or in
  trading costs, raise the share of imported inputs
  and also raise outsourcing relative to
  integration in every country.
• Industries with more productivity dispersion
  (lower z), have a higher share of imported inputs
  and integration is higher relative to outsourcing
  in every country.
• Sectors with higher headquarter intensity (higher
  ?), the share of imported inputs is lower and
  integration is higher relative to outsourcing.
  Consistent with Antràs (2003a) that the share of
  intra-firm imports in total U.S. imports is
  significantly higher, the higher the RD
  intensity of the industry.