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Internalizing Global Value Chains: A Firm-Level Analysis

Author

Listed:
  • Laura Alfaro
  • Paul Antràs
  • Davin Chor
  • Paola Conconi

Abstract

In recent decades, advances in information and communication technology and falling trade barriers have led firms to retain within their boundaries and in their domestic economies only a subset of their production stages. A key decision facing firms worldwide is the extent of control to exert over the different segments of their production processes. We describe a property-rights model of firm boundary choices along the value chain that generalizes Antràs and Chor (2013). To assess the evidence, we construct firm-level measures of the upstreamness of integrated and non-integrated inputs by combining information on the production activities of firms operating in more than 100 countries with Input-Output tables. In line with the model's predictions, we find that whether a firm integrates upstream or downstream suppliers depends crucially on the elasticity of demand for its final product. Moreover, a firm's propensity to integrate a given stage of the value chain is shaped by the relative contractibility of the stages located upstream versus downstream from that stage, as well as by the firm's productivity. Our results suggest that contractual frictions play an important role in shaping the integration choices of firms around the world.

Suggested Citation

  • Laura Alfaro & Paul Antràs & Davin Chor & Paola Conconi, 2017. "Internalizing Global Value Chains: A Firm-Level Analysis," CEP Discussion Papers dp1507, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1507
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    References listed on IDEAS

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    Cited by:

    1. Armando Rungi & Davide Del Prete, 2017. "The ‘Smile Curve’: where Value is Added along Supply Chains," Development Working Papers 428, Centro Studi Luca d'Agliano, University of Milano, revised 10 Apr 2017.
    2. Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
    3. Boehm, Johannes, 2015. "The impact of contract enforcement costs on outsourcing and aggregate productivity," LSE Research Online Documents on Economics 86281, London School of Economics and Political Science, LSE Library.
    4. Chen, Xiaoping & Lu, Yi & Zhu, Lianming, 2017. "Product cycle, contractibility, and global sourcing," Journal of Development Economics, Elsevier, vol. 127(C), pages 283-296.
    5. Griffith, Rachel & Lee, Sokbae & Straathof, Bas, 2017. "Recombinant innovation and the boundaries of the firm," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 34-56.
    6. Conconi, Paola & Sapir, André & Zanardi, Maurizio, 2016. "The internationalization process of firms: From exports to FDI," Journal of International Economics, Elsevier, vol. 99(C), pages 16-30.
    7. Eppinger, Peter S. & Kukharskyy, Bohdan, 2017. "Contracting institutions and firm boundaries," University of Tuebingen Working Papers in Economics and Finance 100, University of Tuebingen, Faculty of Economics and Social Sciences.
    8. Dany Bahar, 2018. "The Hardships of Long Distance Relationships: Time Zone Proximity and Knowledge Transmission within Multinational Firms," CESifo Working Paper Series 7104, CESifo Group Munich.
    9. Loredana Fattorini & Armando Rungi & Zhen Zhu, 2017. "The Organization of Global Supply Networks," Working Papers 08/2017, IMT Institute for Advanced Studies Lucca, revised Nov 2017.
    10. Pol Antràs & Alonso de Gortari, 2016. "On the Geography of Global Value Chains," Working Paper 443991, Harvard University OpenScholar.
    11. Shang-Jin Wei & Yinxi Xie, 2018. "On the Divergence between CPI and PPI as Inflation Gauges: The Role of Supply Chains," NBER Working Papers 24319, National Bureau of Economic Research, Inc.
    12. Zhi Wang & Shang-Jin Wei & Xinding Yu & Kunfu Zhu, 2017. "Characterizing Global Value Chains: Production Length and Upstreamness," NBER Working Papers 23261, National Bureau of Economic Research, Inc.
    13. Raoul Minetti & Pierluigi Murro & Zeno Rotondi & Susan Chun Zhu, 2016. "Financial Constraints, Firms' Supply Chains and Internationalization," CERBE Working Papers wpC06, CERBE Center for Relationship Banking and Economics.
    14. Armando Rungi & Davide Del Prete, 2017. "The 'Smile Curve': where Value is Added along Supply Chains," Working Papers 05/2017, IMT Institute for Advanced Studies Lucca, revised Mar 2017.
    15. Del Prete, Davide & Rungi, Armando, 2017. "Organizing the global value chain: A firm-level test," Journal of International Economics, Elsevier, vol. 109(C), pages 16-30.
    16. Antr�s, Pol & Chor, Davin, 2017. "On the Measurement of Upstreamness and Downstreamness in Global Value Chains," CEPR Discussion Papers 12549, C.E.P.R. Discussion Papers.
    17. repec:elg:eechap:17028_12 is not listed on IDEAS
    18. repec:oup:wbecrv:v:30:y:2017:i:supplement_1:p:s2-s15. is not listed on IDEAS
    19. Laura Alfaro & Maggie Xiaoyang Chen, 2018. "Transportation cost and the geography of foreign investment," Chapters,in: Handbook of International Trade and Transportation, chapter 12, pages 369-406 Edward Elgar Publishing.
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    More about this item

    Keywords

    global value chains; sequential production; incomplete contracts;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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