Economics seminar: Offshoring, relationship-specificity, and domestic production networks - Professor Taiji Furusawa

Event Date: 16 September 2015

Venue: Strathclyde Business School, Cathedral Wing, R5.07b

Time: 16:15

Speaker: Professor Taiji Furusawa

An economy is an interlinked web of production units. Decisions by a buyer will affect the performance of its old and new input suppliers, and vice versa. This paper examines both theoretically and empirically how downstream firms’ offshoring decisions lead to the reorganization of the domestic production network. We build a buyer-seller model that features supplier heterogeneity in efficiency and distance, as well as intermediate inputs that vary in the degree of specificity to the relationship with the buyer. The model predicts that the more productive buyers will source inputs from a larger range of geographic regions, especially for generic inputs. Inputs that are more relationship-specific are less likely to be sourced from distant regions or foreign countries. Starting from these equilibrium sourcing patterns, a decline in offshoring costs leads to dropping of the less productive suppliers that are closer to the buyers, which are to be replaced by the more distant and productive suppliers due to the indirect productivity effect of offshoring. Less relationship-specific suppliers are more likely to be dropped, despite their higher productivity. Using unique and exhaustive data on the buyer-seller network in Japan, we find evidence supporting the main predictions of the model.

Published: 15 September 2015