Information Technology and Global Sourcing

This paper examines how IT influences global sourcing decisions. It
develops a theoretical model to study how IT determines the
decisions of firms located in the high-wage North whether to
offshore production to a low-wage country in the South. Offshoring
to South however is subject to costly communication reflected by
partially incomplete contracting. More sophisticated IT allows more
efficient communication between the Northern headquarter and its
Southern intermediate input supplier and alleviates contractual
frictions. The model provides several predictions about the impact
of IT on the organization of the global supply chain. Complex
industries for which codifiability and verifiability of information
is a much harder task, are more likely to source intermediate
inputs in countries with more efficient IT infrastructure.
Considering the mode of firm organization, more efficient IT
infrastructure is expected to reduce the share of intra-firm trade
in more complex industries. These predictions are examined and
validated using disaggregated industry-level trade data. Most
importantly, these findings are robust to controlling for
well-known sources of comparative advantage and determinants of
firm organization such as factor endowments, financial development
and contract enforcement.