Fact of the Week: Diversification in ICT Goods Sourcing Improved Firm Performance for German Manufacturers
Source: Alexander Schiersch, Irene Bertschek, and Thomas Niebel, “Diversify or Not? – The Link Between Global Sourcing of ICT Goods and Firm Performance,” Discussion Papers of DIW Berlin, no. 2043 (June 2023).
Commentary: A June 2023 discussion paper by Alexander Schiersch, Irene Bertschek, and Thomas Niebel analyzed the relationship between firm performance and diversification of suppliers of imported information and communication technology (ICT) goods. Using data from Germany’s statistical agencies, the study covered over 3,800 German manufacturing firms in 2010 and 2014. The authors measured firm performance according to value added output and gross operating surplus. Additionally, they measured diversification as the share of ICT goods imported from the firm’s primary, or largest, trading partner supplier. In this case, a lower share of goods from the primary supplier would mean greater diversification.
When analyzing the effect of diversification using import shares, a decrease in primary supplier share of 57 percentage points was associated with a 6.2 percent increase in value added output and a 13.7 percent increase in gross operating surplus. To put that in simpler terms, a decrease in the primary supplier share of 10 percentage points would be associated with a 1.1 percent increase in value added output and a 2.4 percent increase in gross operating surplus. These findings indicate that diversification of a firm’s sources of ICT imports improves its performance. While the study used data from 2010 and 2014, its conclusions have important implications for policymakers regarding the importance of diversification as a matter of resilience in the current geopolitical environment. The authors note that disruptions related to COVID-19 and the Ukraine war have resulted in a new appreciation for the role of supply chains in the global economy. By diversifying their supply chains, firms, and by extension countries, can reduce the risks and vulnerabilities associated with dependence on a single supplier.