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Global Sourcing under Imperfect Capital Markets

Juan Carluccio1,2; Thibault Fally3

1 Banque de France · 2 Paris School of Economics · 3 University of Colorado System

The Review of Economics and Statistics 2012

We develop a simple model to study the interactions between a supplier's financial constraints and contract incompleteness in a vertical relationship. Applied to the analysis of multinational firms' sourcing strategies, the model predicts: (i) that complex and specific inputs are more likely to be sourced from financially developed countries and (ii) that multinationals are more likely to integrate suppliers located in countries with poor financial institutions, especially when trade involves complex goods. These predictions are examined and validated using firm-level trade data on multinational firms with operations in France.

DOI
10.1162/rest_a_00219
Volume
94 (3)
Pages
740-763
Language
en
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