Alireza Jay Naghavi

Abstract

We propose the idea that firms slice up global production processes to protect their know-how. Using rich micro data on firm-to-firm trade in automotive components, we uncover a robust U-shaped relationship between the number of components sourced per supplier (concentration) and the strength of intellectual property rights (IPR) protection. Better IPR institutions provide protection but also shift sourcing toward high-tech inputs. In weak-IPR environments, firms procure only low-tech inputs and concentrate on few suppliers. They slice up production at intermediate levels of IPR, where more high-tech inputs are sourced and imitation risk is greatest, and concentrate as protection improves further.