The rise of superstar firms in the United States: The role of global sourcing

Recent trends of global sourcing, market concentration, and aggregate markup have garnered increased attention. This paper examines the impact of global sourcing of inputs on market structure and markup changes in the United States. We develop a theoretical model with heterogeneous firms that suggests only the most-productivity firms will self-select to source inputs overseas, resulting in an increase in the markups and market shares of these leading firms, while lower-productivity firms are crowded out. Based on the theoretical analysis, aggregate markup rises due to both the within-firm markup adjustments and market share concentration among leading firms. We then provide empirical evidence supporting our theoretical predictions, analyzing the effect of imported inputs on markup adjustments, market shares, and industrial markups in the United States over the past four decades. Our results highlight the importance of firms’ self-selection effect in the global sourcing market and its impact on market outcomes. Failing to account for this influencing channel could lead to an underestimation of the contribution of input globalization to the rise of markup and other market consequences.