Supplier-Buyer Proximity and Production to Order Choice

Centro Studi Luca d'Agliano Development Studies Working Paper No. 241

26 Pages Posted: 13 Dec 2008

See all articles by Lorenzo Casaburi

Lorenzo Casaburi

Stanford Institute for Economic Policy Research

G. Alfredo Minerva

University of Bologna - Department of Economics

Date Written: April 1, 2008

Abstract

We study the determinants of the firm-level choice to produce following an order placed by a downstream firm (production to order) or to produce in advance. We rationalize this choice through a simple theoretical model and apply it to a firm-level empirical analysis. Relying on a large panel of Italian manufacturing firms, we show that two main variables affect this choice: the distance between the supplier and the buyer and the degree of product differentiation in downstream industries where products are sold. The impact of proximity on the choice of producing to order crucially depends on the degree of product differentiation in downstream markets. We find that, in industries where average product differentiation is high, production to order prevails if the supplier is located close to the buyer. On the contrary, proximity is associated to production in advance in homogeneous sectors. We also find that, if suppliers are located in a different country from that of the buyers, they will tend to produce to order if product differentiation in downstream industries is low, and produce in advance if product differentiation is high. We also narrow the scope of our analysis to analyze the determinants of production to order originating from the same province where the supplier is located.

Keywords: Industrial Districts, Networks, Production to Order, Relationship-Specific Investments, Trade

JEL Classification: D23, F10, L14, R34

Suggested Citation

Casaburi, Lorenzo and Minerva, Gaetano Alfredo, Supplier-Buyer Proximity and Production to Order Choice (April 1, 2008). Centro Studi Luca d'Agliano Development Studies Working Paper No. 241. Available at SSRN: https://ssrn.com/abstract=1313810 or http://dx.doi.org/10.2139/ssrn.1313810

Lorenzo Casaburi

Stanford Institute for Economic Policy Research ( email )

579 Serra Mall at Galvez St.
Stanford, CA 94305-6015
United States

Gaetano Alfredo Minerva (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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