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

Author

Listed:
  • Ana Fernandes

    (University of Sussex)

  • Heiwai Tang

    (Tufts University ,Centro Studi Luca d'Agliano ,Hong Kong Institute for Monetary Research)

Abstract

This paper uses detailed product-level export data for China and proposes an extension of the Antrˆjs and Helpman (2004) framework that includes investments in component search to investigate the determinants of foreign direct investment (FDI) versus foreign outsourcing. We exploit the coexistence of two regulatory trade regimes for export-processing in China, pure-assembly and import-and-assembly. We find that if Chinese plants import materials and assemble them, 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 existing theories. However, if Chinese plants engage in pure-assembly, under which regime ownership over the materials shipped to China remains with the foreign firm, we find little support for the existing theories on FDI and outsourcing that focus on contract incompleteness and the relative importance of relationship-specific investments. We also find that more dispersed firm productivity in a sector is associated with a larger export share of integrated plants under pure-assembly but not under import-and-assembly. These results are consistent with the predictions of our model, which focuses on ownership of imported components as an alternative to asset ownership for alleviating 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," Working Papers 052010, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:052010
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    References listed on IDEAS

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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
    • 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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