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The determinants of vertical integration in export processing: theory and evidence from China

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  • Fernandes, Ana
  • Tang, Heiwai

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

  • Fernandes, Ana & Tang, Heiwai, 2010. "The determinants of vertical integration in export processing: theory and evidence from China," LSE Research Online Documents on Economics 28728, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:28728
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    More about this item

    Keywords

    Intrafirm trade; vertical integration; export processing; outsourcing;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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