The Dynamics of Global Sourcing

Abstract

This paper studies an import model that incorporates both static crosscountry interdependence and dynamic dependence in firm-level decisions. I find that the benefit of sourcing from one country increases as a firm imports from more countries. Furthermore, using a partial identification approach under the revealed preferences assumption, I provide evidence for the sunk costs of importing, which make establishing relationships with new sellers costlier than maintaining existing ones. The coexistence of cross-country interdependence and sunk costs implies that temporary trade policy changes can have long-lasting effects on both the targeted and non-targeted markets through firm-level decisions.