Input Sourcing in Lopsided Low-income Economies”

Abstract: 

Input sourcing is central to the process of economic development. We first document that, contrary to conventional wisdom, the share of inputs originating abroad is almost as high in Uganda---a landlocked, low-income country---as in rich, open economies. The monthly transaction-level data we use, which cover the universe of formal, firm-to-firm and firm-to-foreign country trade in the Ugandan economy, also reveal that indirect imports are sourced from few firms, and via short supply chains. Together these three ``new'' facts motivate a model of input sourcing in a networked economy. Inputs, output 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 direct and indirect import origins 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.