Discussion Paper

No. 2019-62 | November 14, 2019
Global sourcing, firm size and export survival

Abstract

This paper investigates how firm size and global sourcing affect the export surviving probabilities. By using data on export and import transactions disaggregated by destination/origin for the entire Danish manufacturing firms between the periods 1995–2006, the author is able to classify the firms into different size categories and to observe whether they continue or cease to export. Moreover, he is able to define whether the firms source intermediate inputs from high- or low-wage counties. The results, after controlling for the endogeneity of the international sourcing decision by using IV and matching approach, indicate that firm size is positively correlated with the likelihood of continuing to export. Moreover, for small and medium size firms, global sourcing seems also to increase the probability of staying in the export market but only if they source from high-wage countries. However, sourcing inputs from abroad, no matter if it is from high- or low-wage countries, do not seem to significantly affect the export surviving probabilities for larger firms.

JEL Classification:

F16, F23, J24, L25

Assessment

  • Downloads: 199

Links

Cite As

Roger Bandick (2019). Global sourcing, firm size and export survival. Economics Discussion Papers, No 2019-62, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-62


Comments and Questions


Anonymous - Referee Report 1
December 16, 2019 - 08:37

The aim of the paper is to analyze how firm size and foreign sourcing affect the export surviving probabilities using data from Danish manufacturing firms for the 1995-2006 period. Specifically, the author investigates whether firms’ intra-industry imports of intermediate inputs from different regions (high- or low-wage countries) affect the export ...[more]

... survival rates of small, medium and large firms. In the paper, export exit is defined as total withdrawal of all markets, not only exit from one specific market; this means that the company ceases its export activity. The author measures global sourcing using a dummy variable that equals to 1 for firms that source intra-industry inputs from abroad (narrow sourcing) and 0 otherwise.
The impact of firm size and foreign sourcing on export exit has been studied in several previous papers which main results are summarized by the author in the Introduction section. The novelty of this research is that not only it focuses on the relationship between foreign sourcing and export survival at firm level data but also distinguishes the effect from different sourcing location and different size of firms simultaneously. This is the main contribution of the paper. Overall, this is a very interesting and well conducted study. I only have some suggestions with the aim of improving the author's work.
In Section 2 (Theoretical framework), the author discusses the channels through which foreign sourcing affects the decision to stay or leave the export activity. Some of them affect that decision positively and therefore they contribute to increase the chance of export survival while others affect it negatively. The channels and factors related to foreign sourcing that may lead to higher export survival rates are widely accepted because they are supported by a substantial body of research. From my point of view, the arguments used to suggest that foreign sourcing might lead to higher exit likelihood are more closely related not to ceasing export activity but to exit from a specific market. Moreover, the negative impact on export survival of some of those factors would be more evident when several foreign suppliers are involved in the sourcing activities, that is, when sourcing activities are more global. Anyway, those factors could reduce or even cancel out the positive impact of global sourcing on export survival.
As mentioned above, a firm is considered to be engaged in foreign sourcing if it purchases intra-industry inputs from abroad. Since no minimum threshold is included, it is understood that how much the firm is involved is not relevant for the size of its impact on export survival. It would be very interesting to offer information on the mean quantity of purchased foreign inputs and the dispersion around the mean as well as the differences in the foreign sourcing intensity across firms by age. Based on that information, it may be appropriate to introduce a minimum threshold of foreign sourcing and see if the econometric results are robust when such threshold is required.
Moreover, since information on the country-of-origin of the imported inputs are available, it would be interesting to describe the mean number of sourcing countries and the dispersion around the mean and do that for the three types of firms by size. It is important to have such information to know how global the foreign sourcing is. It is also interesting to explore the distribution between high- and low-wage countries in order to infer how sensitive the results might be to the particular threshold chosen (50 percent) to consider sourcing from high-wage or from low-wage countries.
I suggest introducing in table 3 the characteristics of those exporting and global sourcing firms that mainly source from low-wage countries and those that source mainly from high-wage countries in order to explore if there are differences between them.
Other minor comments:
- Page 5: “Moreover, as in the revenue function the time t is included to account for the learning process in which firms accumulate knowledge about their production process that help them to produce efficiently and to reduce their production costs over time”. The word “as” should be removed.
- In the equations (7) and (8) as well as in the text explaining the variable global sourcing (page 11, 13, 17, 18), the word “sourcing” is misspelled. It appears as “sorucing”.
- On several occasions Dias-Mora is misspelled. It is Diaz-Mora, as it appears in the references.


Roger Bandick - Reply to the Referee 1 Report
January 07, 2020 - 20:46

Response to the referee report in the attached document.


Anonymous - Empirical Questions and Suggestions
December 19, 2019 - 08:34

1) How would results be affected by a different definition of export failure? I would be interested to see the difference between firms who (optimally) stop exporting and those that indeed fail as opposed to optimally exit. For instance, one could use subsequent profits or firm exit to categorize these ...[more]

... two types of firms.
2) The classification of imports into raw materials, semi-manufactured goods and final goods is unclear to me. Which classification do you use and how do you deal with aggregation of product data?
3) I would suggest to use squared sales growth as a volatility measure rather than sales growth relative to industry growth - and to include both in the probit model.
4) Which role does sourcing success/duration play for export survival? Do you distinguish between initial sourcing and irregular imports?


Roger Bandick - Reply to the Anonymous reader.
January 07, 2020 - 20:48

I am very thankful for all the comments and suggestion made by the anonymous reader. The responses are outlined below.

1) How would results be affected by a different definition of export failure? I would be interested to see the difference between firms who (optimally) stop exporting and those that ...[more]

... indeed fail as opposed to optimally exit. For instance, one could use subsequent profits or firm exit to categorize these two types of firms.

Response:
I think this comment is more relevant if the aim is to analyze the export exit behavior of the firms from a specific market as they may do that in order to shift exporting to another more optimal foreign market. However, in this paper the aim is to analyze how firm size and foreign sourcing affect the export exit as total withdrawal of all markets. Whether the firms stop exporting due to optimally exit is beyond the aim of this paper.

2) The classification of imports into raw materials, semi-manufactured goods and final goods is unclear to me. Which classification do you use and how do you deal with aggregation of product data?

Response:
Following Hummels, D., Jørgensen, R., Munch, J. and Xiang, C., (2014), "The Wage Effects of Offshoring: Evidence from Danish Matched Worker-Firm Data." American Economic Review, 104w(6): 15971629 , I define raw materials as imports in HS categories 01–15, 25–27, 31 and 41.

3) I would suggest to use squared sales growth as a volatility measure rather than sales growth relative to industry growth - and to include both in the probit model.
Response:
This is obviously very good suggestion that I will consider when revising the paper.

4) Which role does sourcing success/duration play for export survival? Do you distinguish between initial sourcing and irregular imports?

Response:
As a response to similar comment from referee 1, I re-estimate Table 6 excluding the lowest 10 percent of the global firms according to their share of foreign inputs over total sales. The main results remain unchanged.