Internetization, supplier search, and diversification of global supply chains

Abstract

Diversifying global supply chains (GSCs) is a vital approach to improving economic resilience. When firms diversify their foreign suppliers, information frictions are a major challenge. Internetization may mitigate this challenge through more efficient information communication. We estimate a dynamic discrete choice model of the search for new suppliers under information frictions, allowing the level of internetization to influence search costs as well as productivity. Using data from Chinese manufacturing firms, internetization is found to relieve information frictions, reducing search costs by RMB 0.3 – 0.5 million. Additionally, internetization raises firms’ productivity by 0.8%. The quantitative analysis indicates that internetization and search decisions of firms are mutually reinforcing. By facilitating the search for foreign suppliers, internetization promotes the diversification of GSCs and strengthens the resilience of firms. Notably, the primary channel through which internetization exerts its impact is by reducing search costs, whereas the productivity channel plays a relatively minor role.