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The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China

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  • Ana Fernandes

    () (University of Sussex)

  • Heiwai Tang

    () (Tufts University and Centro Studi Luca d’Agliano)

Abstract

Using detailed product-level export data for China and a variant of the Antràs and Helpman (2004) model that includes investments in component search, we examine the sectoral determinants of foreign direct investment (FDI) versus foreign outsourcing in export processing trade. We exploit the coexistence of two regulatory export processing regimes in China, which specify who owns and controls the imported components for export processing. We find that in the regime that Chinese plants own the imported components, the share of exports from vertically integrated plants is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with the property- rights theory of intra-firm trade. However, in the regime that foreign firms own the imported components, no significant relationship is found between the prevalence of vertical integration, headquarter intensity and input contractibility across sectors. The positive relationship between productivity dispersion and the export share of integrated plants across sectors, as suggested by the existing literature, is found only in the regime that foreign firms own the imported components. These results are consistent with our model, which considers ownership of imported components as an alternative to asset ownership to alleviate the hold-up problem by the export-processing plant.

Suggested Citation

  • Ana Fernandes & Heiwai Tang, 2010. "The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China," Development Working Papers 289, Centro Studi Luca d'Agliano, University of Milano, revised 30 Apr 2010.
  • Handle: RePEc:csl:devewp:289
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    File URL: http://www.dagliano.unimi.it/media/WP2010_289.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Intra rm 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
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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