Scientific paper

Buyers’ Sourcing Strategies and Suppliers’ Markups in Bangladeshi Garments

Julia Cajal-Grossi, Rocco Macchiavello, and Guillermo Noguera

2023

#Trade and FDI

#South Asia

#Energy

Do suppliers' margins in global value chains depend on buyers' approach to sourcing? We distinguish between international buyers adopting relational versus spot sourcing strategies in the Bangladeshi garment sector. Our data allow us to match inputs used by exporters to produce specific orders for different buyers. Within suppliers, we show that orders produced for relational buyers earn higher prices than comparable orders produced for spot buyers. These orders however do not differ in the type, prices, or effciency of variable inputs. We interpret these patterns through the lens of a model of garment production that allows for capacity constraints, order-varying input prices, and a technology that is specific to the exporter, product, and time combination. The model yields a sufficient statistic for differences in markups across orders and, thus, across buyers. Within exporter-product-time triplets, we find that relational buyers pay approximately 11% higher markups relative to spot buyers for comparable export orders. Additional evidence suggests that these higher markups reflect, at least in part, incentives paid to suppliers to undertake non-contractible actions.