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Buyers' sourcing strategies and suppliers' markups in Bangladeshi garments

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  • Cajal-Grossi, Julia
  • Macchiavello, Rocco
  • Noguera, Guillermo

Abstract

We study differences in markups earned by Bangladeshi garment exporters across buyers with different sourcing strategies and make three contributions. First, we distinguish buyers with a relational versus a spot sourcing strategy and show that a buyer's sourcing strategy is correlated across products and origins. Buyer fixed effects explain most of the variation in sourcing strategies, suggesting that these depend on organizational capabilities. Second, we use novel data that match quantities and prices of the two main variable inputs in the production of garments (fabric and labor on sewing lines) to specific export orders. We derive conditions under which these data allow measurement of within exporter-product-time differences in markups across orders produced for different buyers. Third, we show that exporters earn higher markups on otherwise identical orders produced for relational, as opposed to spot, buyers. A sourcing model with imperfect contract enforcement, idiosyncratic shocks to exporters, and buyers that adopt different sourcing strategies trading off higher prices and reliable supply rationalizes this and other observed facts in the industry. We discuss alternative explanations and policy implications.

Suggested Citation

  • Cajal-Grossi, Julia & Macchiavello, Rocco & Noguera, Guillermo, 2023. "Buyers' sourcing strategies and suppliers' markups in Bangladeshi garments," LSE Research Online Documents on Economics 120547, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:120547
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    References listed on IDEAS

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    1. James Richardson, 1993. "Parallel sourcing and supplier performance in the Japanese automobile industry," Strategic Management Journal, Wiley Blackwell, vol. 14(5), pages 339-350, July.
    2. Greg Distelhorst & Jens Hainmueller & Richard M. Locke, 2017. "Does Lean Improve Labor Standards? Management and Social Performance in the Nike Supply Chain," Management Science, INFORMS, vol. 63(3), pages 707-728, March.
    3. Distelhorst, Greg & Hainmueller, Jens & Locke, Richard M., 2015. "Does Lean Improve Labor Standards? Management and Social Performance in the Nike Supply Chain," Research Papers 3465, Stanford University, Graduate School of Business.
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    Cited by:

    1. Herkenhoff, Philipp & Krautheim, Sebastian & Semrau, Finn Ole & Steglich, Frauke, 2024. "Corporate Social Responsibility along the global value chain," Journal of Development Economics, Elsevier, vol. 167(C).
    2. Rocco Macchiavello & Ameet Morjaria, 2023. "Relational Contracts: Recent Empirical Advancements and Open Questions," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 673-700.
    3. Mohammad Rayhan Miah & Masaru Ichihashi, 2024. "The Impact of Access to Intermediate Inputs on Export Margins: Firm-Level Evidence from the Regression Decomposition Approach," Sustainability, MDPI, vol. 16(10), pages 1-29, May.
    4. Cajal-Grossi, Julia & Del Prete, Davide & Macchiavello, Rocco, 2023. "Supply chain disruptions and sourcing strategies," International Journal of Industrial Organization, Elsevier, vol. 90(C).

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    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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