Global sourcing and business networks: quality heterogeneity and firms' efficiency

Global sourcing can increase firms' productivity via the quality upgrading of intermediates, but, because of the heterogeneity of suppliers, it also increases screening costs of final firms given the need to search for good suppliers. We build up a simple model to analyze these factors and show that large firms can better exploit the potential gains from quality upgrading. Moreover, we show that business & social networks make both the overall production and firms' profitability increase via the reduction in firms' unit screening costs. There are cumulative beneficial effects of these networks: thicker networks imply higher cost saving and thus further incentives to invest in network linkages. Finally, we sketch a possible extension of the model to analyze the choice of local vs. global sourcing strategies and how their differences, in terms of costs, suppliers' heterogeneity and degree of embeddedness in networks, affect firms' choices and their efficiency.