Global Sourcing and Credit Constraints

Canadian Journal of Economics, Forthcoming

Posted: 16 Nov 2016 Last revised: 30 Nov 2016

See all articles by Leilei Shen

Leilei Shen

Kansas State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2016

Abstract

This paper incorporates credit constraints into a model of global sourcing and heterogeneous firms. Following Antras and Helpman (2004), 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 U.S. intra-firm imports. An increase in TFP from the 25th to the 75th percentile in the TFP triple interactions increase the share of U.S. 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 U.S. intra-firm imports at the median by 21%.

Keywords: Fi

JEL Classification: F12, F13, F14, F36, G20, G28, G32

Suggested Citation

Shen, Leilei, Global Sourcing and Credit Constraints (July 15, 2016). Canadian Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2869982

Leilei Shen (Contact Author)

Kansas State University - Department of Economics ( email )

Manhattan, KS 66506-4001
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
247
PlumX Metrics