Global Sourcing

Antras & Helpman 2004

Overview
N-S Model
Final Goods Producers situated in North.
Choice of location to source inputs

Equilibrium in which firms with different

productivity levels choose different ownership
structures
Effects of within-sectoral heterogeneity and
variations in industry on prevalance of
organizational forms.
Antrs 2003 with incorporation of heterogeneity a
la Melitz 2003.

Background
Different ownership models: Standard vertical
integration, FDI, outsourcing abroad, outsourcing
in domestic country
Example: Intels FDI strategy
Example: Nikes arms-length import strategy
Powerful role of international specialization
WTO 1998 Annual Report: In the production of

an American car, 30% of the cars value in

Korea, 17.5%in Japan, 7.5% in Germanyonly
37% of production value in America!

The Model
representative consumer in each country with
quasi-linear preferences:

Aggregate consumption in sector j is a CES

function
Elasticity of substitution within sector between
varieties:
1/1-Alpha

Inverse Demand function:

Technology
Producers of differentiated goods face a perfectly
elastic supply of labor.
w N > wS
Monopolistic competition
As in Melitz (2003), producers needs to incur sunk
entry costs wN fE, after which they learn their
productivity:
G ().
As in Antrs (2003a), final-good production
combines two specialized inputs, according to the
technology:

Technology
H: final-good producer (agent H), m: supplier
(agent M).
Sectors vary in their intensity of headquarter
services
Within sectors, firms differ in productivity
After observing , H decides exit or produce.
Producing incurs additional fixed costs depending
on
k {V, O} and l {N, S},

Contracts
Incomplete contracts:

N S In times of contractual breach, Integration

in North can recover a higher fraction of output.
The outside option of H under outsourcing is zero.
The outside option of M is zero regardless of
ownership structure and location.
Hs profit-maximizing organizational mode will
also maximize joint profits.

Equilibrium
Profit function:

By choosing k and l, H
is chooses triplet (lk,
wl, f lk)
Profit is decreasing in f
and w
lk is largest when lk
= ()

Industry Equilibrium
Upon observing , a final-good producer H
chooses the ownership structure and the location
maximizing profit, or exits the industry and
forfeits the fixed cost of entry wN fE
j
Firms with (X) stay in the industry
Free entry condition:

Organizational Forms:
Trade offs
Location decision: Variable costs are lower in
the South, but fixed costs are higher there.
Integration decision: Integration improves
efficiency of variable production when the
intensity of headquarter services is high, but
involves higher fixed costs. This decision will
depend on , but also on .

Component Intensive
Sector

This implies O () > V () for l = N, S, which

together with the fixed costs ordering implies that
any form of integration is dominated in
equilibrium.

Headquarter Intensive
Sector

All four organizational forms exist in equilibrium

Relative Prevalence
Relative prevalence is measured by the share of
products produced in various organizational forms
(V or O, in N or S).
Distribution:
MO: the fraction of active firms that outsource in
country l in the component-intensive sector.
Then:

Substituting for the cutoffs yields:

Relative Prevalance
Component-intensive
Decline in Southern wage rate?

Fall in Transport costs?

Increase in dispersion of productivity?

z

Relative Prevalance
Headquarter-intensive
A fall in the relative wage in the South or in trading
costs, raise the share of imported inputs and also
raise outsourcing relative to integration in every
country.
Industries with more productivity dispersion (lower
z), have a higher share of imported inputs and
integration is higher relative to outsourcing in every
country.
Sectors with higher headquarter intensity (higher ),
the share of imported inputs is lower and integration
is higher relative to outsourcing. Consistent with
Antrs (2003a) that the share of intra-firm imports
in total U.S. imports is significantly higher, the
higher the R&D intensity of the industry.