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Global sourcing and credit constraints

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  • Leilei Shen

Abstract

This paper incorporates credit constraints into a model of global sourcing and heterogeneous firms. Following Antràs and Helpman, heterogeneous firms decide whether to outsource or integrate input suppliers. Financing of fixed organizational costs requires borrowing with credit constraints and collateral based on tangible assets. The party that controls intermediate inputs is responsible for these financing costs. Sectors differ in their reliance on external finance and countries vary in their financial development. The model predicts that increased financial development decreases the share of integration relative to outsourcing in a country. The effect is more pronounced in sectors with a high reliance on external finance. However, this effect is mitigated by higher productivity (TFP) and headquarter intensity. Empirical examination confirms the predictions of the model. An improvement in financial development from the 25th to the 75th percentile in industries at the 75th percentile in finance dependence relative to those at the 25th percentile is associated with a 16.8% decrease in the median share of US intra-firm imports. An increase in TFP from the 25th to the 75th percentile in the TFP triple interactions increase the share of US intra-firm imports at the median by 3.2%. An increase in headquarter intensity from the 25th to the 75th percentile in the headquarter intensity triple interactions increase the share of US intra-firm imports at the median by 21%.

Suggested Citation

  • Leilei Shen, 2017. "Global sourcing and credit constraints," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 778-803, August.
    • Handle: RePEc:cje:issued:v:50:y:2017:i:3:p:778-803
    DOI: 10.1111/caje.12278
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    Cited by:

    1. Nunn, Nathan & Trefler, Daniel, 2014. "Domestic Institutions as a Source of Comparative Advantage," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 263-315, Elsevier.
    2. Van Tien Nguyen & Ngoc Thang Doan, 2023. "Open account, import decision and financial constraints: A cross‐country firm‐level study," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 3918-3937, October.
    3. Saibal Kar & Meghna Dutta, 2018. "Outsourcing and Productivity During Economic Crisis: Evidence from Indian Manufacturing Firms," Arthaniti: Journal of Economic Theory and Practice, , vol. 17(2), pages 168-182, December.
    4. Chen, Qifei & Shen, Yanzhi, 2021. "The impacts of offshore and onshore outsourcing on China's upgrading in global value chains: Evidence from its manufacturing and service sectors," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 263-280.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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