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Economics Seminar

Author:

• Davin Chor
  National University of Singapore

During the past decades, technological progress and falling trade barriers have allowed firms to slice up their value chains across borders, retaining within their boundaries and in their domestic economies only a subset of their production stages. A key question facing firms worldwide is figuring out which segments of the value chain are more profitably offshored, outsourced, or both. Building on Antras and Chor (2013), we describe a property-rights model in which the organization (ownership structure and location) of a firm's manufacturing process is shaped by characteristics of the different stages of production and their position in the value chain. To assess the evidence, we use the WorldBase dataset, which contains plant-level information on the production activities of firms located in a large set of countries and territories. We combine this information with input-output data to construct firm-level measures of the upstreamness of integrated and non-integrated stages. In line with the model's predictions, we find that whether a firm integrates suppliers upstream or downstream depends crucially on the size of the elasticity of demand faced by the firm. Moreover, the probability that the firm integrates a supplier at a given stage in the value chain is shaped by the whole profile of marginal productivities and costs upstream and downstream from that stage.