Code for Production Clustering and Offshoring

I introduce a model of international production that allows the production chain to be of any length or number of sourcing countries, while imposing only weak assumptions on the structure of production and trade costs. The production process does not have to be perfectly sequential, and the final goods can be made from any number of independent subchains. I show that in this model, allocation decisions at different stages of production are interdependent, which generates a new channel of proximity-concentration trade-off. The presence of trade costs makes firms cluster their production in certain countries while trade liberalization allows firms to fragment their production more and exploit productivity differences between countries more efficiently. Clustering patterns depend on the characteristics of the production structure, with stronger clustering associated with longer and less connected structures. Clustering intensity in upstream stages of production is generally higher and less affected by exogenous changes in production structure.