Input Sourcing in Lopsided Low-income Economies

About this event

Input sourcing is central to the process of economic development. Using transaction-level data on the universe of formal, firm-to-firm and firm-to-foreign country trade in Uganda---a landlocked, low-income country---we first document that the share of inputs originating abroad is almost as high as in rich, open economies, a fact that is contrary to conventional wisdom. Two additional underlying patterns---indirect imports are sourced from few firms, and indirect imports are sourced via short supply chains---motivate a model of input sourcing in a networked economy. Inputs, outputs quantities, and output prices are determined by firms maximizing profits subject to input prices and both a domestic and international sourcing network. Decreases in the cost of imports lead to lower prices for importers' output in the domestic market. We exploit exchange rate shocks and firms' prior import origins---both direct and indirect---to test the model's predictions. When the relative cost of foreign goods decreases, direct importers import more. However, first- and higher-order indirect importers import \textit{less}, instead buying more foreign content domestically. Pass-on price effects appear to ``magnify' network structures that economize on high fixed costs of importing, widening access to foreign content but hindering substitution to direct international trade.