Inventory and the Shape of the Earth

33 Pages Posted: 19 Jul 2007

See all articles by Richard K. Lai

Richard K. Lai

The Wharton School, Univ. of Pennsylvania

Date Written: June 19, 2006


How important are local country conditions to firms' operations performance, as revealed in their inventory levels? Under a "flat world" hypothesis, differences in firms' inventory levels are explained more by differences among industries and firms themselves, rather than differences among country conditions (e.g., institutions, infrastructure). In a "round earth" hypothesis, country factors out-weigh firm and industry factors. Using all COMPUSTAT observations for manufacturing firms in 70 countries, covering the years 1994 through 2004, we find little evidence for the "round earth" hypothesis. In our baseline model, country effects explain at most 12.7% of inventory variance, while firm differences explain 35.5%, and industry differences explain 28.5%. This finding is robust to a number of sensitivity tests. Apart from the empirical contribution, this finding can be a useful stylized fact for further theoretical development into the locus of inventory variance. It also has a practical implication - perhaps inventory practices are much more transportable across countries than we have known before.

Keywords: Inventory, international comparison, flat world, round earth, variance decomposition

JEL Classification: D24, D82, M11, E32

Suggested Citation

Lai, Richard K., Inventory and the Shape of the Earth (June 19, 2006). Available at SSRN: or

Richard K. Lai (Contact Author)

The Wharton School, Univ. of Pennsylvania ( email )

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Philadelphia, PA 19104-6365
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215 898 1630 (Phone)

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