Measuring the Input Rank in Global Supply Networks

TL;DR

This paper introduces the Input Rank, a new measure of supplier relevance in global value chains, considering network position, input patterns, and competitive pressures, with applications to U.S. and global data and firm integration decisions.

Contribution

It develops the Input Rank metric to quantify supplier relevance, incorporating network structure and market dynamics, and demonstrates its predictive power for corporate vertical integration.

Findings

Services inputs are highly relevant in supply networks.

Domestic and regional suppliers tend to have higher Input Ranks.

Input Rank effectively predicts firms' vertical integration choices.

Abstract

We introduce the Input Rank as a measure of relevance of direct and indirect suppliers in Global Value Chains. We conceive an intermediate input to be more relevant for a downstream buyer if a decrease in that input's productivity affects that buyer more. In particular, in our framework, the relevance of any input depends: i) on the network position of the supplier relative to the buyer, ii) the patterns of intermediate inputs vs labor intensities connecting the buyer and the supplier, iii) and the competitive pressures along supply chains. After we compute the Input Rank from both U.S. and world Input-Output tables, we provide useful insights on the crucial role of services inputs as well as on the relatively higher relevance of domestic suppliers and suppliers coming from regionally integrated partners. Finally, we test that the Input Rank is a good predictor of vertical integration choices made by 20,489 U.S. parent companies controlling 154,836 subsidiaries worldwide.