“Offshoring, Relationship Specicity, and Domestic Production Networks” by Taiji Furusawa
Hitotsubasshi University, Japan
Johns Hopkins University
An economy is an interlinked web of production units. An offshoring decision by a buyer will affect its existing input suppliers, and vice versa. Using unique and comprehensive firm- level data on the buyer-seller network in Japan, this paper investigates how downstream firms. offshoring decisions are associated with the reorganization of the domestic production network. We find that increases in a buyer's imports, at both the intensive and extensive margins, are associated with a higher probability of dropping domestic suppliers. The relationship is more pronounced if the imports are from other Asian countries, and surprisingly for suppliers that are larger, older, more productive, and produce standardized inputs. Increased imports by a buyer at both margins are also associated with a higher probability of adding suppliers, particularly so for the larger and more productive ones. To rationalize these findings, we build a buyer-seller model that features supplier heterogeneity in efficiency and distance, as well as intermediate inputs that vary in the degree of specificity to the relationship with the buyer.