Professor Bao Qun: Domestic Trade Network, Geographical Distance and Localization of Suppliers

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The paper Domestic Trade Network, Geographical Distance and Localization of Suppliers co-authored by Prof. Bao Qun, Dr. Dan Jiali and doctoral student Wang Yunting has been published in Economic Research Journal, a top Chinese economics journal, in the 6th issue of 2023.

As the modern trade network becomes increasingly complicated, effective and flexible supplier relationship management is critical to the business operation and performance of firms. By introducing headquarter relocation as an event study, this paper aims at investigating how the change in geographic distance affects the choice of trade partners in the domestic trade network. This paper develops a theoretical framework based on the incomplete contract model of Antras & Helpman (2004) , and their model shows that the change of trade partners essentially depends on the trade-off between the search cost of new suppliers and the maintenance cost of the old ones. Based on the customer-supplier matching data of Chinese listed firms from 2001 to 2017, the empirical outcome of this paper shows: (1) Firms who relocate their headquarters are more likely to experience business relationship replacement , and this effect is more significant in long-distance relocation. (2) If firms have higher search efficiency for new business relationships or less sticky business relationships with their old partners, the probability of replacing their original partners will also be higher. Firms with a lower degree of reliance on intermediate inputs are also more likely to select new suppliers. (3) The choice of trade partners depends on the geographical distance, which consequently leads to the endogenous formation of a domestic trade network. In general, this study reveals the importance of timely adjustment and effective monitoring of business relationships during volatile times with high uncertainty and risk in the business environment.

Founded in 1955, Economic Research Journal is a national journal of comprehensive economic theories sponsored by the Institute of Economics of Chinese Academy of Social Sciences and administered by Chinese Academy of Social Sciences. It is widely recognized as a top economic journal by universities and institutes in China.