Comment on “Geographic Diversification of the Supply Chains of Japanese Firms”

Abstract

Supply chains have evolved into ever more complex networks of buyers and sellers over time. A key property of these networks is the interconnectedness of firms. This property is a double-edged swordwhile firms benefit from participating in such networks, their very interconnectedness to other firms also exposes them to additional risks. These risks include exogenous shocks brought about by natural disasters and pandemics. Todo and Inoue (2021) provide a review of the empirical evidence of how supply chain participation and diversification affect firms when they experience such shocks (directly or indirectly).The lessons drawn from the literature make sensereducing the degree of supply chain concentrationwhether through increasing substitutability and diversificationcan improve the robustness and resilience of supply chain firms.An intriguing finding highlighted by Todo and Inoue ( 2021) is the impact of geographical diversification of supply chains on the robustness and resilience of firms in the short term and medium/long term. That locally concentrated supply chains are superior to more diffused ones in the medium/longer term seems to suggest that agglomeration economies could be an important element. There are hints in the paper, but the relationship between agglomeration economies and supply chain networks is not fully fleshed out. It is an essential point as agglomeration economies are not just a high concentration of local supply chains.This leads to the question of the micro-foundations of supply chain networks. Todo and Inoue (2021) have been pioneers in using agent-based models to simulate the propagation of shocks from natural disasters through supply chain networks in Japan (Inoue & Todo, 2019a, 2019b. The one-off impacts of these shocks have been studied using models in which firms are embedded in networks (calibrated with real data) and follow fixed rules on production, inventory as well as sale. These are essentially percolation models which are very useful in estimating the immediate damage from natural disasters. Modeling and simulating longer term effects of shocks will require more malleable firm behavior. Otherwise, the impact of natural disasters might

Deglobalization: Editors' Overview

“…Keun Lee (2024) argues that there are reasons related to originality, generality, and cycle times to suggest that foundational AI is not a general-purpose technology or development and that it will not have impacts of the size of those related to the introduction of electricity or microelectronics. Lee is sympathetic to Meltzer's suggestion that some recent international agreements/negotiations are not for trade negotiations but rather a means to align approaches to technological issues involving opportunities and challenges of emerging technologies.…”