How important is to have a good supplier for the success of a firm? This project based in China will shed some light on the role that the supply side of the economy plays on firm performance.

Inputs provided by suppliers account for much of firms’ sales, but very little is known about the effect of suppliers on firm performance. A small literature has explored some determinants and implications of supply chains. McMillan and Woodruff (1999) documented the central role of relational contracts for supplier-client interactions. Bernard et al. (2015) measured the impact of a new speed train on access to suppliers and firm performance. In a PEDL funded project (Cai and Szeidl, 2016 – to see the previous PEDL project please click here), the researchers used a field experiment in China to show that managerial networks - but not necessarily suppliers - have a large and significant growth effect on SMEs. This projects adds to this literature in two ways. First, it documents basic facts about the contribution of suppliers to firm heterogeneity; second, it uses experimental variation to identify and measure their causal effects on firm performance.

The project will collect unique data on the full map of the supplier-client network by surveying small producers in the same line of business, as well as their actual and potential suppliers in China (the latter by asking local experts). As very little is known about suppliers, in the first part of the analysis the researchers use these data to document basic facts. Hence, they will measure heterogeneity in the choice of suppliers among firms producing the same product, quantify the extent of sorting between suppliers and clients, infer the contribution of suppliers to firm heterogeneity and estimate the welfare cost of supplier misallocation (estimated using a production function with supplier fixed effects). In the second part of the analysis the researchers will identify causal effects with a randomized intervention. They will connect some producers to an additional "good" supplier, others to an additional "less good" supplier, and a control group to no suppliers. Comparing between these groups measures the search cost of finding new suppliers and the impact of supplier quality on firm performance.

Research on supply chains is scarce. The scanty evidence we have suggests that supply chains havebecome extremely important when weak legal institutions give rise to contracting problems (McMillan and Woodford, 1999). This is the case not just in low-income countries but also in China. Therefore, results from this project will be relevant to inform policymakers that intend to impact supplier-client matching. Finding large effects of suppliers on performance and significant misallocation would in fact imply that addressing frictions in these markets is key. The projects’ design, which introduces suppliers to clients, is a step towards creating a matching market which can improve supplier-client matches. In the longer term the researchers expect to see a centralized market that operates similarly to two-sided markets in developed countries.