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Determinants of vertical integration in export processing: Theory and evidence from China

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  • Fernandes, Ana P.
  • Tang, Heiwai

Abstract

This paper examines the determinants of vertical integration versus outsourcing in export processing, by exploiting the coexistence of two export processing regimes in China, which designate by law who owns and controls the imported components. Based on a variant of the Antràs-Helpman (2004) model, we show theoretically that control over imported components for assembly can affect firm integration decisions. Our empirical results show that when Chinese plants control the use of components, the export share of foreign-owned plants is positively correlated with the intensity of inputs provided by the headquarter (capital, skill, and R&D). These results are consistent with the property-rights theory of intra-firm trade. However, when foreign firms own and control the components, there is no evidence of a positive relationship between the intensity of headquarters' inputs and the prevalence of vertical integration. The results are consistent with our model that considers control over imported components as an alternative to asset ownership to alleviate hold-up by export-processing plants.

Suggested Citation

  • Fernandes, Ana P. & Tang, Heiwai, 2012. "Determinants of vertical integration in export processing: Theory and evidence from China," Journal of Development Economics, Elsevier, vol. 99(2), pages 396-414.
  • Handle: RePEc:eee:deveco:v:99:y:2012:i:2:p:396-414
    DOI: 10.1016/j.jdeveco.2012.05.004
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    Cited by:

    1. Sergey Mityakov & Heiwai Tang & Kevin K. Tsui, 2013. "International Politics and Import Diversification," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 1091-1121.
    2. Fabrice Defever & Alejandro Riaño, 2016. "Protectionism through Exporting: Subsidies with Export Share Requirements in China," Discussion Papers 2016-03, University of Nottingham, GEP.
    3. Defever, Fabrice & Fischer, Christian & Suedekum, Jens, 2016. "Relational contracts and supplier turnover in the global economy," Journal of International Economics, Elsevier, vol. 103(C), pages 147-165.
    4. Fernandes, Ana P. & Tang, Heiwai, 2014. "Learning to export from neighbors," Journal of International Economics, Elsevier, vol. 94(1), pages 67-84.
    5. Manova, Kalina & Yu, Zhihong, 2016. "How firms export: Processing vs. ordinary trade with financial frictions," Journal of International Economics, Elsevier, vol. 100(C), pages 120-137.
    6. Li, Fangyi & Song, Zhouying & Liu, Weidong, 2014. "China's energy consumption under the global economic crisis: Decomposition and sectoral analysis," Energy Policy, Elsevier, vol. 64(C), pages 193-202.
    7. Sheng, Liugang & Yang, Dennis Tao, 2016. "Expanding export variety: The role of institutional reforms in developing countries," Journal of Development Economics, Elsevier, vol. 118(C), pages 45-58.
    8. Sergey Mityakov & Heiwai Tang & Kevin K. Tsui, 2012. "InternationalPolitics and Import Diversification in the Second Wave of Globalization," Discussion Papers Series, Department of Economics, Tufts University 0770, Department of Economics, Tufts University.
    9. Brandt, Loren & Morrow, Peter M., 2017. "Tariffs and the organization of trade in China," Journal of International Economics, Elsevier, vol. 104(C), pages 85-103.
    10. Chen, Xiaoping & Lu, Yi & Zhu, Lianming, 2017. "Product cycle, contractibility, and global sourcing," Journal of Development Economics, Elsevier, vol. 127(C), pages 283-296.
    11. Julien Gourdon & Stéphanie Monjon & Sandra Poncet, 2014. "Incomplete VAT rebates to exporters : how do they affect China's export performance?," Working Papers 2014-05, CEPII research center.
    12. Defever,Fabrice Fernand & Reyes,Jose Daniel & Riano,Alejandro & Sanchez Martin,Miguel Eduardo, 2016. "Does the elimination of export requirements in special economic zones affect export performance? evidence from the Dominican Republic," Policy Research Working Paper Series 7874, The World Bank.
    13. repec:eee:chieco:v:47:y:2018:i:c:p:245-262 is not listed on IDEAS
    14. Sandra PONCET & Julien GOURDON & Laura HERING & Stéphanie MONJON, 2014. "Export management and incomplete VAT rebates to exporters: the case of China," Working Papers P117, FERDI.
    15. repec:bla:coecpo:v:35:y:2017:i:4:p:735-750 is not listed on IDEAS
    16. Dai, Mi & Maitra, Madhura & Yu, Miaojie, 2016. "Unexceptional exporter performance in China? The role of processing trade," Journal of Development Economics, Elsevier, vol. 121(C), pages 177-189.
    17. repec:dau:papers:123456789/13784 is not listed on IDEAS
    18. Antrà s, Pol & Yeaple, Stephen R., 2014. "Multinational Firms and the Structure of International Trade," Handbook of International Economics, Elsevier.
    19. Yoshimichi Murakami & Keijiro Otsuka, 2017. "A Review of the Literature on Productivity Impacts of Global Value Chains and Foreign Direct Investment: Towards an Integrated Approach," Discussion Paper Series DP2017-19, Research Institute for Economics & Business Administration, Kobe University.
    20. Ge, Ying & Lai, Huiwen & Zhu, Susan Chun, 2015. "Multinational price premium," Journal of Development Economics, Elsevier, vol. 115(C), pages 181-199.
    21. Defever, Fabrice & Riaño, Alejandro, 2017. "Subsidies with export share requirements in China," Journal of Development Economics, Elsevier, vol. 126(C), pages 33-51.
    22. Ari Van Assche & Jo Van Biesebroeck, 2017. "Functional upgrading in China’s export processing sector," Working Papers Department of Economics 590692, KU Leuven, Faculty of Economics and Business, Department of Economics.
    23. repec:dau:papers:123456789/14545 is not listed on IDEAS

    More about this item

    Keywords

    Intra-firm trade; Vertical integration; Export processing; Outsourcing;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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