Firm-to-Firm Matching Along the Global Supply Chain. Evidence from US - India Trade (Working Paper)
Every year, US firms engage in import transactions with more than 1 million firms from around the world. Together, these transactions span more than 1.5 million pairs of buyer-supplier relationships. These numbers have grown sharply over the last 20 years. Falling trade costs and improved supply chain management technology have led US firms to outsource parts of the production chain to developing countries. Firms in these countries now perform tasks at many different stages along the global supply chain from the production of basic inputs to complex assembly of parts and manufacturing of final goods.
Although the matching between buyers and suppliers plays an important role in international transactions, our understanding of this matching process remains limited. In large part, this is because data that allows us to observe detailed information about firms on both sides is not easily available.
Do the best US companies work with the best suppliers for a given product? Does this matching process look different when US companies purchase final goods such as t-shirts and when they purchase an intermediate good such as yarn?
To answer this question I applied to become a Special-Sworn Status researcher with the US Census and get access to a confidential dataset containing the details of all import transactions that US firms engage in. Adding additional data sources, I created a new dataset which allows us to observe detailed characteristics of US buyers and their overseas suppliers in India.
I found that high-performing US buyers also have high-performing Indian suppliers, with performance measured by firm size. But this is the case only when US firms purchase final goods, such as consumer products. When they buy intermediates (primarily those used in the production of other intermediates), high-performing US buyers work with both high- and low-performing suppliers.
Economic theory offers a potential explanation for the patterns we see in the data. When US firms purchase final goods (such as t-shirts) they find it optimal to spend relatively more resources on searching for the best suppliers than when they are looking to purchase intermediates (such as the cotton or the yarn to make the t-shirt). That's because if suppliers assigned to the final stages of production end up making mistakes they destroy a larger amount of value than those suppliers in charge of the earlier stages of production. There is a second force at play here. For a given stage of production high-performing buyers will spend even more resources than low-performing buyers finding the best suppliers. This leads to an equilibrium in which firms sort by their performance when they purchase final goods. High (low)-performing buyers end up working with high (low)-performing suppliers. For intermediates, the amount of resources that buyers spend on finding suppliers is much lower so US firms end up working with low and high performing suppliers irrespective of their own performance.