Supplier-Buyer Proximity and Production to Order Choice

Lorenzo Casaburi () and Gaetano Alfredo Minerva
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Lorenzo Casaburi: University of Bologna and Harvard University

No 241, Development Working Papers from Centro Studi Luca d'Agliano, University of Milano

Abstract: We study the determinants of the firm-level choice to produce following an order placed by a downstream firm (production to order) or to produce in advance. We rationalize this choice through a simple theoretical model and apply it to a firm-level empirical analysis. Relying on a large panel of Italian manufacturing firms, we show that two main variables affect this choice: the distance between the supplier and the buyer and the degree of product differentiation in downstream industries where products are sold. The impact of proximity on the choice of producing to order crucially depends on the degree of product differentiation in downstream markets. We find that, in industries where average product differentiation is high, production to order prevails if the supplier is located close to the buyer. On the contrary, proximity is associated to production in advance in homogeneous sectors. We also find that, if suppliers are located in a different country from that of the buyers, they will tend to produce to order if product differentiation in downstream industries is low, and produce in advance if product differentiation is high. We also narrow the scope of our analysis to analyze the determinants of production to order originating from the same province where the supplier is located.

Keywords: Industrial Districts; Networks; Production to Order; Relationship-Specific Investments (search for similar items in EconPapers)
JEL-codes: D23 F10 L14 R34 (search for similar items in EconPapers)
Pages: 26
Date: 2008-04-15
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Persistent link: https://EconPapers.repec.org/RePEc:csl:devewp:241

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