| I study the determinants and effects of how multinational firms source intermediate goods. The first chapter studies the choice of multinational firms between outsourcing and vertical integration and its evolution. I develop a dynamic model where the buyer's trust towards her supplier evolves over time depending on the supplier's performance. In the long term when trust is high, ownership is allocated to the party that can contribute the most to the performance of the relationship. In the short term, however, limited trust can lead to alternative sourcing modes, resulting in switches of ownership as trust accumulates over time. Empirical results using US intrafirm imports data exhibit that the share of intrafirm imports decreases as the number of years of transaction rises, suggesting the evolution from vertical integration to outsourcing as trust accumulates in US manufacturing industries.;In the second chapter, I investigate demand uncertainty as a determinant of the international `make-or-buy' problem. I show that the choice of sourcing mode under uncertainty depends on the durability of the goods. The impact of uncertainty is bigger in durable industries because the gap between production decisions and actual sales is longer. A simple model based on Grossman and Helpman (2002) shows that vertical integration (outsourcing) is more likely to be the industry equilibrium under uncertain demand in the durable (nondurable) industries. US industry-level intrafirm trade data exhibit consistent results.;The third chapter studies the impact of sourcing modes on international trade in recessions. During the recent recession in 2008-09, intrafirm trade fell less and adapted more swiftly to changes in demand than the arm's length trade. I present a two-country general equilibrium model to explain the heterogenous responses of intermediate goods trade depending on the sourcing mode. Based on the theoretical and empirical evidence, the model assumes that vertically integrated firms manage the inventory more effectively than outsourcing firms at added costs. The model economy is able to replicate the resilience of the intrafirm trade, predicting that arm's length and intrafirm import collapse by 30.8 and 18.7 percent of the steady state level in response to an aggregate demand shock. |
