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Inventories mitigate the risk of global sourcing. I present new evidence
of the rise in U.S. manufacturing inventories after 2005, reversing a
declining trend that lasted for decades. I examine this trend in a model of
delivery times and inventories. The rise in global sourcing lead to longer
and more volatile delivery times, which increase a firm’s exposure to risk.
Thus, firms hold more inventories. I find the rise in global sourcing accounts
for 86% of the rise in inventories. Further, a globalized economy
that uses more foreign inputs trades-off the increase in output at the cost
of increased macroeconomic volatility.
