Global Sourcing under Uncertainty
Jerónimo Carballo
2017-06-08 - I examine how firms’ global sourcing strategies affect their responses to economic crises such as the 2008-2009 recession. I model firms’ entry, exit and sourcing decisions (integrated production or outsourcing) under demand uncertainty. Uncertainty increases the option value of waiting, resulting in less integration as well as less entry and exit. Additionally, I show that trade decisions of integrated firms are less sensitive to uncertainty shocks. I test these predictions using detailed U.S. firm level exports during 2002-2011 and find that integration reduces the probability that a firm exits by as much as 8%, while moving from 25th percentile in the uncertainty distribution to the 75th increases this probability by 7%.