Global Sourcing and Firm Inventory During the Pandemic

U.S. manufacturing inventories have been increasing since 2005, reversing a declining trend that lasted for decades.I document the rise in inventories over sales observed across different countries' manufacturing sector, U.S. businesses, types of inventories, and across manufacturing industries and firms.While the long term decline is well-understood as a consequence of improvements in transportation technology, I explore the role of increasing delivery times in the rise of inventories.The rise in inputs from China, that face particularly long and volatile delivery times, increased firm's exposure to the demand and delivery time risk, thus increasing the incentives to hold inventories.A model with different and stochastic delivery times, calibrated to match the improvements in transportation technology and the rise in input trade, is able to explain 50% of the initial decline and 81% of the rise in inventories after 2005.Last, I find that an economy that uses more foreign inputs their prices will be lower, since firms can source cheaper inputs from abroad, but they will be more volatile since firms are more exposed to the demand and delivery time shocks.