The Cost of Global Sourcing

In this paper, we empirically quantify the inventory cost of global sourcing. We use Danish microdata to analyze how importing affects the inventory investment of firms in manufacturing, wholesaling and retailing industries. We find that  (i) firms that start to import hold significantly more inventory than comparable firms in the same industry that do not import, (ii) inventory investment is increasing in the volume of imports, and (iii) inventory investment represents an important indirect trade cost. We suggest a theory-based novel matching approach to estimate trade friction associated with inventory investment. Our results suggest that inventory cost amount to 14% of import starters' pre-tax profits. Moreover, we find that inventory cost constitutes up to 25% of the importing friction.