Exporting and sourcing strategies

Abstract

This study uses firm-level panel data for South Korea for the period 2006-2015, to investigate changes in firms' sourcing behaviors after these firms start exporting. The data studied includes detailed information on firms' export status, whether their purchases of intermediate inputs were domestic or from foreign markets, and whether the supplier firms were affiliated or non-affiliated. To estimate the effects of exporting on firms' sourcing strategies, we employ a difference-in-differences estimator with propensity score matching. The main finding is that participation in export markets leads to the increased use of intermediate inputs purchased from foreign suppliers; it also increases these firms' sourcing from affiliated parties relative to sourcing from non-affiliated suppliers. These changes in firms' sourcing compositions after their entry into export markets are mainly driven by purchasing rather than subcontracting. These findings point out that firms that newly participate in exporting tend to improve their product competitiveness by increasing the proportion of their intermediate inputs from foreign affiliates. It is also possible that these firms expanded their foreign networks after they begin export activities, and this plays a role in how and where they source their intermediate inputs.