The Link between Organizational Choice and Global Input Sourcing Under Sequential Production
In a North-South model of international trade in intermediate inputs, we analyze the ways firms procure their inputs in the presence of relationship-specific investments and incomplete contracts. Production is sequential such that an upstream input is used to produce a downstream input, which is then used to produce a final output. Three types of agents are involved in production: upstream suppliers, downstream suppliers and final-good producers (firms). Based on their productivity, final-good producers decide where to source inputs in each production stage and while doing so, they also choose their organizational mode (vertical integration versus outsourcing) to alleviate the hold-up problem that stems from contract incompleteness. We show that these decisions are connected between stages such that the sourcing location of the upstream input may affect the organizational choice in the downstream stage due to the asymmetry in the hold-up friction between the North and South. We then examine how within sectoral heterogeneity and variations in industry characteristics influence the relative prevalence of firms that choose to (i) procure inputs from different locations, and (ii) form different organizational structures
Year of publication: |
2023
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Authors: | Karabay, Bilgehan |
Publisher: |
[S.l.] : SSRN |
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