Within Firm Supply Chains: Evidence from India

Citation:

Shresth Garg and Brandon Joel Tan. Working Paper. “Within Firm Supply Chains: Evidence from India.” Revise & Resubmit. Journal of International Economics.
paper1.66 MB

Abstract:

Vertical integration is central to understanding patterns of economic activity, but there has been limited empirical work measuring the extent to which firms own and utilize direct upstream and downstream production links for sourcing physical inputs. We use administrative data from Karnataka, India on the universe of good shipments between any two establishments to answer this question. We can identify if two establishments are under joint ownership allowing us to map the flow of goods both within and across firms. We calculate that 11% of input value can be potentially sourced from vertically integrated upstream establishments. We find that 38% of products are sourced by establishments exclusively from within the firm when a vertically integrated supplier exists, while the rest are almost entirely sourced exclusively from outside the firm. This suggests that the supply of physical goods along the production chain is an important rationale for vertical integration in India. Our data allows us to improve upon the methodology employed in the literature so far to measure within-firm trade. We highlight two sources of measurement and aggregation bias in previous studies, and show that there is a large impact on the results. Next, we quantify the extent to which firm boundaries serve as barriers to trade in our context by estimating a gravity specification. Finally, we look at factors associated with the decision to source a given product from within and find that firm size, physical distance to outside and within firm suppliers, frequency of input requirements, product relationship specificity, volume, R&D requirements and competition both upstream and downstream are important factors.
Last updated on 08/30/2021