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Lock-In, Vertical Integration, and Investment: The Case of Eastern European Firms

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  • Liliane Giardino-Karlinger

Abstract

A key prediction of transaction cost economics (TCE) is that the presence of relationship-specific assets increases the likelihood of vertical integration whenever contracts are incomplete. I explore a firm-level data set on Eastern European and Central Asian firms, the BEEPS 2005 Survey provided by the EBRD and World Bank, to test this prediction. I measure lock-in by supplier substitution, and find the TCE prediction confirmed in the data. Testing whether the determinants of vertical integration also drive investment decisions, I find that lock-in raises the probability to engage in R&D, at least on the subsample of fully privately owned, non-exporting firms.

Suggested Citation

  • Liliane Giardino-Karlinger, 2016. "Lock-In, Vertical Integration, and Investment: The Case of Eastern European Firms," Review of Economics and Institutions, Universit√† di Perugia, vol. 7(1).
  • Handle: RePEc:pia:review:v:7:y:2016:i:1:n:1
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    More about this item

    Keywords

    vertical integration; supplier substitution; transition countries;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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