Global Sourcing and Domestic Production Networks

79 Pages Posted: 28 Sep 2017

See all articles by Taiji Furusawa

Taiji Furusawa

University of Tokyo

Tomohiko Inui

Gakushuin University

Keiko Ito

Senshu University - School of Economics

Heiwai Tang

The University of Hong Kong - Faculty of Business and Economics; CESIfo; Kiel Institute for the World Economy

Date Written: September 19, 2017


This paper studies how firms’ offshoring decisions shape a country’s domestic production net- works. We develop a model in which heterogeneous firms source inputs from multiple industries located in different domestic regions and foreign countries. Input sourcing entails communication with suppliers, which is endogenously increasing in the differentiation of inputs. The model predicts that firms are less likely to source differentiated inputs, especially from distant domestic and foreign suppliers, due to costly communication. Triggered by foreign countries’ export supply shocks, firms start offshoring inputs from foreign suppliers, which displace the less productive domestic suppliers in the same industry (the direct displacement effect). The resulting decline in marginal costs induces firms to start sourcing from the more productive and distant domestic suppliers within industries (the within-industry restructuring effect), but possibly also from nearby suppliers that produce inputs that are more differentiated than those supplied by existing suppliers (the industry composition effect). The net effect of offshoring on a firm’s domestic production networks depends on the relative strength of the three effects, which we verify using data for 4.5 million buyer-seller links in Japan. Based on a firm-level instrument, we find that after offshoring, firms are less likely to drop suppliers on average, but more so for the larger ones. They tend to add nearby suppliers producing differentiated inputs. These results suggest that firms offshoring may increase the spatial concentration of domestic production networks.

Keywords: production networks, global sourcing, offshoring, face-to-face communication, industry agglomeration

JEL Classification: D220, O850, F140, L100, L140, R120

Suggested Citation

Furusawa, Taiji and Inui, Tomohiko and Ito, Keiko and Tang, Heiwai, Global Sourcing and Domestic Production Networks (September 19, 2017). CESifo Working Paper Series No. 6658, Available at SSRN: or

Tomohiko Inui

Gakushuin University ( email )

1-5-1 Mejiro
Toshima-ku Tokyo 171-8588
United States

Keiko Ito

Senshu University - School of Economics ( email )

Kanagawa 214-8580

Heiwai Tang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong

CESIfo ( email )

Poschinger Str. 5
Munich, DE-81679

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100

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