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Determinants of Vertical Integration: Finance, Contracts, and Regulation

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  • Daron Acemoglu
  • Simon Johnson
  • Todd Mitton

Abstract

We study the determinants of vertical integration in a new dataset of over 750,000 firms from 93 countries. Existing evidence suggests the presence of large cross-country differences in the organization of firms, which may be related to differences in financial development, contracting costs or regulation. We find cross-country correlations between vertical integration on the one hand and financial development, contracting costs, and entry barriers on the other that are consistent with these "priors". Nevertheless, we also show that these correlations are almost entirely driven by industrial composition; countries with more limited financial development, higher contracting costs or greater entry barriers are concentrated in industries with a high propensity for vertical integration. Once we control for differences in industrial composition, none of these factors are correlated with average vertical integration. However, we also find a relatively robust differential effect of financial development across industries; countries with less-developed financial markets are significantly more integrated in industries that are more human capital or technology intensive.

Suggested Citation

  • Daron Acemoglu & Simon Johnson & Todd Mitton, 2005. "Determinants of Vertical Integration: Finance, Contracts, and Regulation," NBER Working Papers 11424, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11424 Note: CF IO
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    Cited by:

    1. Dragicevic, Arnaud Z. & Barkaoui, Ahmed, 2017. "Forest-based industrial network: Case of the French timber market," Forest Policy and Economics, Elsevier, vol. 75(C), pages 23-33.
    2. Christopher Hansman & Jonas Hjort & Gianmarco León & Matthieu Teachout, 2017. "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters," NBER Working Papers 23949, National Bureau of Economic Research, Inc.
    3. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant-Size Distribution and Cross-Country Income Differences," NBER Chapters,in: NBER International Seminar on Macroeconomics 2008, pages 243-272 National Bureau of Economic Research, Inc.
    4. Laura Alfaro & Andrew Charlton, 2009. "Intra-industry Foreign Direct Investment," American Economic Review, American Economic Association, vol. 99(5), pages 2096-2119, December.
    5. Luigi Pascali, 2009. "Contract Incompleteness, Globalization and Vertical Structure: an Empirical Analysis," Boston College Working Papers in Economics 727, Boston College Department of Economics.
    6. Alfaro, Laura & Charlton, Andrew, 2006. "International financial integration and entrepreneurship," LSE Research Online Documents on Economics 19796, London School of Economics and Political Science, LSE Library.
    7. Roman Fossati, 2011. "Outsourcing versus Vertical Integration: A Dynamic Model of Industry Equilibrium," 2011 Meeting Papers 1421, Society for Economic Dynamics.
    8. Ishiguro, Shingo, 2010. "Contracts, search, and organizational diversity," European Economic Review, Elsevier, vol. 54(5), pages 678-691, July.
    9. Pol Antràs & Mihir A. Desai & C. Fritz Foley, 2009. "Multinational Firms, FDI Flows, and Imperfect Capital Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 1171-1219.
    10. Rocco Macchiavello, 2007. "Vertical Integration, Missing Middle and Investor Protection in Developing Countries," Economics Series Working Papers 373, University of Oxford, Department of Economics.
    11. Michele Moretto & Gianpaolo Rossini, 2008. "Vertical Integration and Operational Flexibility," Working Papers 2008.37, Fondazione Eni Enrico Mattei.
    12. Macchiavello, Rocco, 2006. "Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence," CEPR Discussion Papers 5903, C.E.P.R. Discussion Papers.
    13. Shingo Ishiguro, 2007. "Organizational Dynamics," Discussion Papers in Economics and Business 07-14, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    14. Ursino Giovanni, 2015. "Supply Chain Control: A Theory of Vertical Integration," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(4), pages 1831-1866, October.
    15. Macchiavello, Rocco, 2007. "Financial Constraints and the Costs and Benefits of Vertical Integration," CEPR Discussion Papers 6104, C.E.P.R. Discussion Papers.
    16. Joseph P.H. Fan & Jun Huang & Randall Morck & Bernard Yeung, 2009. "Vertical Integration, Institutional Determinants and Impact: Evidence from China," NBER Working Papers 14650, National Bureau of Economic Research, Inc.
    17. TOMIURA Eiichi, 2007. "Global Sourcing, Technology, and Factor Intensity: Firm-level Relationships," Discussion papers 07024, Research Institute of Economy, Trade and Industry (RIETI).
    18. Papaioannou, Elias, 2007. "Finance and growth: a macroeconomic assessment of the evidence from a European angle," Working Paper Series 787, European Central Bank.
    19. Laura Alfaro & Andrew Charlton, 2007. "International Financial Integration and Entrepreneurial Firm Activity," NBER Working Papers 13118, National Bureau of Economic Research, Inc.
    20. Ruan, Jianqing & Zhang, Xiaobo, 2008. "Credit constraints, organizational choice, and returns to capital: Evidence from a rural industrial cluster in China," IFPRI discussion papers 830, International Food Policy Research Institute (IFPRI).

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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