November 15, 2017
Germs, Roads and Trade: Resilience of Globally Sourcing Firms in Face of the SARS Epidemic
Huanwei Huang (LSE)
Global sourcing has allowed firms to find the best input from a global market but also exposed them to foreign shocks. Which firms are more resilient to shocks along the supply chain? Does better infrastructure improve their resilience? To answer these questions, I first set up a model of global sourcing which incorporates domestic trade costs and two-stage sourcing using customs services. The model predicts that high productivity firms are more diversified, which makes them more resilient to adverse shocks along the supply chain. Trade liberalization or better infrastructure induces firms to further diversify their sourcing strategies. Then I explore the 2003 SARS epidemic as a natural experiment to study the resilience of Chinese manufacturing importers. Imports fell by 7.9% on average when the trade route was hit by SARS, but as much as 52.0% for a firm without any diversification. The epidemic increased the average firm marginal cost and reduced aggregate manufacturing output by about 0.7% at its peak. Connectivity to roads increased firms' resilience to the epidemic by facilitating input diversification.
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