Do Institutions determine Economic Geography? Evidence from the Concentration of Foreign Suppliers

Abstract

Do institutions shape the geographic concentration of industrial activity? We explore this question in an international trade setting by examining the relationship between country-level institutions and patterns of spatial concentration of global sourcing. A priori, weak institutions could be associated with either dispersed or concentrated sourcing. We exploit location and transaction data on imports by U.S. firms and adapt the Ellison and Glaeser (1997) index to construct a product-country-specific measure of supplier concentration for U.S. importers. Results show that U.S. importers source in a more spatially concentrated manner from countries with weaker contract enforcement. We find support for the idea that, where formal contract enforcement is weak, local supplier networks compensate by sharing information to facilitate matching and transactions. Full paper available at http://doi.org/10.1016/j.jue.2019.02.001

Keywords: Buyer-seller match, Global sourcing, Contract enforcement, Institutions, Spillovers, Trade