This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Vertical Integration, Missing Middle and Investor Protection in Developing Countries

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Rocco Macchiavello
Abstract

The industrial organization of developing countries is characterized by: i) pervasive use of subcontracting arrangements among small firms, ii) "missing middle" in the firm size distribution, and iii) financially constrained firms. This paper studies an incomplete contract model in which the integration decision is chosen to maximize the returns of two vertically related projects to an external investor. The model jointly determines the financing, size and organization of firms. Vertical integration trades-off the benefits of joint liability against the cost of rendering the supply chain more opaque from the point of view of investors. The model shows that vertical integration is more likely to arise for intermediate levels of investor protection and that better contract enforcement reduces vertical integration only if financial markets are sufficiently developed. Moreover, the firm size distribution is more likely to display a missing middle in industries which favor vertical integration. The model sheds light on the industrial organization of developing countries showing that the motives for vertical integration are not necessarily higher in those countries.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.economics.ox.ac.uk/Research/wp/pdf/paper373.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 373.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 2007
Date of revision:
Handle: RePEc:oxf:wpaper:373

Contact details of provider:
Postal: Manor Rd. Building, Oxford, OX1 3UQ
Email:
Web page: http://www.economics.ox.ac.uk/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Mark George).

Related research
Keywords: Vertical Integration Missing Middle Industrial Development Financial Constraints Joint Liability Trade Credit Community Based Idustries

Find related papers by JEL classification:
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
G30 - Financial Economics - - Corporate Finance and Governance - - - General
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October. [Downloadable!] (restricted)
    Other versions:
  2. Lamoreaux, Naomi R, 1998. "Partnerships, Corporations, and the Theory of the Firm," American Economic Review, American Economic Association, vol. 88(2), pages 66-71, May. [Downloadable!] (restricted)
  3. Levy, Brian, 1990. "Transactions costs, the size of firms and industrial policy : Lessons from a comparative case study of the footwear industry in Korea and Taiwan," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 151-178, November. [Downloadable!] (restricted)
  4. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December. [Downloadable!] (restricted)
    Other versions:
  5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
    Other versions:
  6. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 74-102, April.
  7. Sendhil Mullainathan & David Scharfstein, 2001. "Do Firm Boundaries Matter?," American Economic Review, American Economic Association, vol. 91(2), pages 195-199, May. [Downloadable!] (restricted)
  8. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February. [Downloadable!] (restricted)
    Other versions:
  9. Robert Cull & Lance E. Davis & Naomi R. Lamoreaux & Jean-Laurent Rosenthal, 2005. "Historical Financing of Small- and Medium-Sized Enterprises," NBER Working Papers 11695, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Park, Albert & Shen, Minggao, 2003. "Joint liability lending and the rise and fall of China's township and village enterprises," Journal of Development Economics, Elsevier, vol. 71(2), pages 497-531, August. [Downloadable!] (restricted)
    Other versions:
  11. Macchiavello, Rocco, 2006. "Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence," CEPR Discussion Papers 5903, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Schmitz, Hubert, 1995. "Small shoemakers and fordist giants: Tale of a supercluster," World Development, Elsevier, vol. 23(1), pages 9-28, January. [Downloadable!] (restricted)
  13. Patrick Legros & Andrew F. Newman, 1992. "Wealth Effects," Discussion Papers 1024, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  14. Maitreesh Ghatak & Raja Kali, 2001. "Financially Interlinked Business Groups," CEI Working Paper Series 2002-5, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  15. Woodruff, Christopher, 2002. "Non-contractible investments and vertical integration in the Mexican footwear industry," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1197-1224, October. [Downloadable!] (restricted)
  16. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, 04. [Downloadable!] (restricted)
  17. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June. [Downloadable!]
  18. Patrick Legros & Andrew F. Newman, 2004. "Competing for Ownership," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-148, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  19. Abhijit Banerjee & Kaivan Munshi, 2004. "How Efficiently is Capital Allocated? Evidence from the Knitted GarmentIndustry in Tirupur," Review of Economic Studies, Blackwell Publishing, vol. 71(1), pages 19-42, 01. [Downloadable!] (restricted)
  20. Maitreesh Ghatak & Raja Kali, 2001. "Financially Interlinked Business Groups," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 10(4), pages 591-619, December. [Downloadable!] (restricted)
Full references

Statistics
Access and download statistics

Did you know? You too can volunteer for RePEc, for example by editing a NEP report.

This page was last updated on 2008-11-17.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.