Ownership and Productivity in Vertically-Integrated Firms: Evidence from the Chinese Steel Industry

We study productivity differences in vertically-integrated Chinese steel facilities using a unique data set that provides equipment-level information on material inputs and output in physical units and equipment size for each of the three main stages in the steel value chain, i.e., sintering, pig-iron making, and steel making. We find that private vertically-integrated facilities are more productive than provincial state-owned (SOEs) facilities, followed by central SOEs. This ranking lines up with our productivity estimates in the two downstream production stages, but central SOEs outperform in sintering, most likely because of their superior access to higher quality raw materials. The productivity differential favoring private facilities declines with their size, turning negative for facilities larger than the median. These patterns are linked with equipment-level TFP in private firms as size expands, and the internal configuration of vertically-integrated facilities, which reflect the greater constraints facing private firms. Increasing returns to scale at the stage and facility-level partially offset these costs and rationalize firms' choice on larger vertically-integrated facilities.