NBER WORKING PAPER SERIES
THE MARGINS OF GLOBAL SOURCING:
THEORY AND EVIDENCE FROM U.S. FIRMS
Pol Antràs
Teresa C. Fort
Felix Tintelnot
Working Paper 20772
http://www.nber.org/papers/w20772
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
December 2014
Any opinions and conclusions expressed herein are those of the authors and do not necessarily
represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no
confidential information is disclosed. We are grateful to Treb Allen, Isaiah Andrews, Andy
Bernard, Emily Blanchard, Ariel Burstein, Arnaud Costinot, Pablo Fajgelbaum, Paul Grieco,
Gene Grossman, Elhanan Helpman, Sam Kortum, Marc Melitz, Eduardo Morales, and Michael
Peters for useful conversations, to Andrés Rodríguez-Clare for his comments while discussing the
paper at the NBER, to the editor (Penny Goldberg) and two anonymous referees for their
constructive comments, and to Xiang Ding, BooKang Seol and Linh Vu for excellent research
assistance. We have also benefited from very useful feedback from seminar audiences at Aarhus,
AEA Meetings in Boston, Barcelona GSE, Bank of Spain, Boston College, Boston University,
Brown, Cambridge University, Chicago Booth, Dartmouth, ECARES, the Econometric Society
Meeting in Minneapolis, ERWIT in Oslo, Harvard, IMF, John Hopkins SAIS, LSE, Michigan,
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Princeton, Sciences Po in Paris, SED in Toronto, Syracuse, Tsinghua, UBC, UC Berkeley, UC
Davis, UC San Diego, Urbana-Champaign, Virginia, and Yale. We thank Jim Davis at the Boston
RDC for invaluable support with the disclosure process. The views expressed herein are those of
the authors and do not necessarily reflect the views of the National Bureau of Economic
Research.
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© 2014 by Pol Antràs, Teresa C. Fort, and Felix Tintelnot. All rights reserved. Short sections of
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credit, including © notice, is given to the source.
The Margins of Global Sourcing: Theory and Evidence from U.S. Firms
Pol Antràs, Teresa C. Fort, and Felix Tintelnot
NBER Working Paper No. 20772
December 2014, Revised July 2016
JEL No. C63,D21,D22,F12,F23,F61,L11,L16,L23
ABSTRACT
We develop a quantifiable multi-country sourcing model in which firms self-select into importing
based on their productivity and country-specific variables. In contrast to canonical export models
where firm profits are additively separable across destination markets, global sourcing decisions
naturally interact through the firm's cost function. We show that, under an empirically relevant
condition, selection into importing exhibits complementarities across source markets. We exploit
these complementarities to solve the firm's problem and estimate the model. Comparing
counterfactual predictions to reduced-form evidence highlights the importance of
interdependencies in firms' sourcing decisions across markets, which generate heterogeneous
domestic sourcing responses to trade shocks.
Pol Antràs
Department of Economics
Harvard University
1805 Cambridge Street
Littauer Center 207
Cambridge, MA 02138
and NBER
pantras@fas.harvard.edu
Teresa C. Fort
Tuck School of Business
Dartmouth College
100 Tuck Hall
Hanover, NH 03755
and NBER
teresa.fort@tuck.dartmouth.edu
Felix Tintelnot
Department of Economics
University of Chicago
5757 South University Avenue
Chicago, IL 60637
and NBER
tintelnot@uchicago.edu
1 Introduction
The world is becoming increasingly globalized. Dramatic advances in communication, information,
and transportation technologies have revolutionized how and where firms produce their goods. Inter-
mediate inputs account for approximately two thirds of international trade (Johnson and Noguera,
2012), and vertical specialization across countries is an important and growing feature of the world
economy (Hummels et al., 2001; Hanson et al., 2005). As global value chains rise in importance, a
firm’s production is more likely than ever to span multiple countries. There is also mounting evidence
that firm-level decisions play a critical role in explaining trade patterns (Bernard et al., 2009), and that
they have important ramifications for aggregate productivity, employment, and welfare (Goldberg et
al., 2010; Hummels et al., 2014).
Despite the growing importance of global production sharing, the typical model of firm-level trade
decisions focuses on exporting rather than importing. Since every international trade transaction
involves an exporter and an importer, a natural question is: why not simply use the structure of
the well-known exporting framework to analyze firms’ import decisions? Existing export models
cannot be applied directly to analyze foreign sourcing for a simple – yet powerful – reason. While the
canonical export model ensures that a firm’s decision to enter each market can be analyzed separately
by assuming constant marginal costs, a firm chooses to import precisely because it seeks to lower its
marginal costs. In a world in which firm heterogeneity interacts with fixed sourcing costs, the firm’s
decision to import from one market will also affect whether it is optimal to import from another
market. Foreign sourcing decisions are therefore interdependent across markets, making a model
about importing much more complicated to solve theoretically and to estimate empirically.
In this paper, we develop a new framework to analyze firm-level sourcing decisions in a multi-
country world. An important focus of the model is on firms’ extensive margin decisions about which
products to offshore and the countries from which to purchase them. Bernard et al. (2009) find
that these margins account for about 65 percent of the cross-country variation in U.S. imports, and
Bernard et al. (2007) show that U.S. importers are on average more than twice as large and about 12
percent more productive than non-importers.
1
In Figure 1, we extend this evidence to show not only
that importers are larger than non-importers, but also that their relative size advantage is increasing
in the number of countries from which they source. The figure indicates that firms that import from
one country are more than twice the size of non-importers, firms that source from 13 countries are
about four log points larger, and firms sourcing from 25 or more countries are over six log points
bigger than non-importers. These importer size advantages are suggestive of sizable country-specific
fixed costs of sourcing, which limit the ability of small firms to select into importing from a large
number of countries.
2
1
We obtain very similar findings when replicating these analyses for the sample of U.S. manufacturing firms used in
our empirical analysis (see the Online Appendix).
2
To construct the figure, we regress the log of firm sales on cumulative dummies for the number of countries from
which a firm sources and industry controls. The omitted category is non-importers, so the premia are interpreted as the
difference in size between non-importers and firms that import from at least one country, at least two countries, etc.
The horizontal axis denotes the number of countries from which a firm sources, with 1 corresponding to firms that use
only domestic inputs. These premia are robust to controlling for the number of products a firm imports and the number
of products it exports, and thus do not merely capture the fact that larger firms import more products. Consistent
1
Figure 1: Sales premia and minimum number of sourcing countries in 2007
0 2 4 6
Premium
1 3 5 7 9 11 13 15 17 19 21 23 25
Minimum number of countries from which firm sources
Premium 95% CI
Not only do country-specific fixed costs of sourcing appear to be empirically relevant, but the ease
with which firms can begin sourcing from a country also seems to vary across countries in ways that
are distinct from these countries’ appeal as a source of marginal cost reductions. To illustrate this
variation, Table 1 shows the number of U.S. firms that import from a country versus total sourcing
from that country. The table lists the top ten source countries for U.S. manufacturers in 2007, based
on the number of importing firms. These countries account for 93 percent of importers in our sample
and 74 percent of imports. The first two columns show that Canada ranks number one based on the
number of U.S. importers and total import value. For most other countries, however, country rank
based on the number of importers does not equal the rank based on import values. China is number
two for firms but only number three for value; and Mexico, the number two country in terms of value,
ranks eighth in terms of importers. As another way to assess the differences in the intensive and
extensive margins of imports across countries, we compare the share of total importers that source
from a country (column 4) to the share of imports sourced from that country (column 6). These
relative values also differ significantly. For example, the U.K. and Taiwan account for only three and
two percent of total imports, respectively, but 18 percent of all importers source from the U.K., and
16 percent source from Taiwan.
The considerable divergence between the intensive and extensive margins presented in Table 1
suggests that countries differ in terms of their potential as a marginal cost-reducing source of inputs
and the fixed costs firms must incur to import from them. In section 2, we develop a quantifiable
multi-country sourcing model that allows for this possibility. Heterogeneous firms self-select into
importing based on their productivity and country-specific characteristics (wages, trade costs, and
technology). The model delivers a simple closed-form solution for firm profits, in which marginal
costs are decreasing in a firm’s sourcing capability, which is itself a function of the set of countries
with selection into importing, the same qualitative pattern is also evident among firms that did not import in 2002, and
when using employment or productivity rather than sales. See the Online Appendix for additional details.
2
Table 1: Top 10 source countries for U.S. firms, by number of firms
Rank by: Number of Importers Value of Imports
Firms Value Firms % of Total Imports % of Total
Canada 1 1 37,800 59 145,700 16
China 2 3 21,400 33 121,980 13
Germany 3 5 13,000 20 62,930 7
United Kingdom 4 6 11,500 18 30,750 3
Taiwan 5 11 10,500 16 16,630 2
Italy 6 13 8,500 13 13,230 1
Japan 7 4 8,000 12 112,250 12
Mexico 8 2 7,800 12 125,960 14
France 9 9 6,100 9 22,980 3
South Korea 10 10 5,600 9 20,390 2
Notes: Sample is U.S. firms with some manufacturing activity in 2007. Number of firms rounded to
nearest 100 for disclosure avoidance. Imports in millions of $s, rounded to nearest 10 million for disclosure
avoidance.
from which a firm imports, as well as those countries’ characteristics. Firms can, in principle, buy
intermediate inputs from any country in the world, but acquiring the ability to import from a country
entails a market-specific fixed cost. As a result, relatively unproductive firms may opt out of importing
from high fixed cost countries, even if they are particularly attractive sources of inputs.
In this environment, the optimality of importing from one country necessarily depends on the
other countries from which a firm sources its inputs. This stands in sharp contrast to standard
export models, where it is reasonable to assume constant marginal costs so that the decision to sell
in one market is independent of export decisions in other markets. This constant marginal cost
assumption is clearly not tenable for sourcing decisions, since the firm chooses to import precisely in
order to lower its marginal costs. The resulting interdependence in a firm’s extensive margin import
decisions complicates the firm’s problem considerably, as it now involves a combinatorial problem
with 2
J
possible choices, where J denotes the number of possible source countries.
Despite these complications, we provide the first characterization of the firm’s extensive margin
sourcing decisions. First, we show that source countries can be complements or substitutes, depending
only on a parametric restriction that relates the elasticity of demand faced by the final-good producer
to the dispersion of input productivities across locations. When demand is inelastic or input efficiency
differences are small, the addition of a country to a firm’s global sourcing strategy reduces the marginal
gain from adding other locations. In such a “substitutes case,” the firm’s optimal choice of countries
to include in its sourcing strategy is extremely hard to characterize, both analytically as well as
quantitatively. High productivity firms may opt into countries with high fixed costs but with the
potential for high marginal cost savings, thus rendering further marginal cost reductions less beneficial.
Although low productivity firms would also like to source from these locations, the high fixed costs
may preclude them from doing so. In this scenario, high productivity firms will always source from
3
