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The Role of Agglomeration and Technology in Shaping Firm's Strategy and Organization

  • Giulio Cainelli

    ()

  • Donato Iacobucci

    ()

Vertical integration, i.e. the control of activities along the production chain, is a fundamental issue for understanding firms’ strategic choices and production organization. In this paper we analyze the determinants of vertical integration in Italian manufacturing firms testing some hypotheses drawn from the transaction cost economics (TCE) and the property rights theory (PRT). Specifically, we focus on the role played by structural variables, such as spatial agglomeration and technology. While the role of technology in influencing vertical integration has been already investigated, the impact of spatial agglomeration is a novel contribution of this paper. The PRT makes the prediction that greater technology intensity of producers should be associated with greater vertical integration while greater technology intensity of suppliers should be associated with less vertical integration. The TCE makes the opposite hypothesis as the technology intensity of suppliers is associated with investment specificity, thus inducing vertical integration. As far as spatial agglomeration is concerned PRT makes the prediction that spatial proximity encourages vertical integration by raising the threat of knowledge appropriation by competitors. This effect is positive in high tech sectors while should be negligeable in low tech sectors. On the contrary TCE predicts a negative relationship between spatial agglomeration and vertical integration due to the reduction of opportunism within spatial clusters, such as industrial districts. In the empirical part of the paper we take advantage of a large data set on Italian business groups referring to 2001 which allow us to identify the production activities controlled by the same owner. In addition, using the Italian input-output table we are able to assess when these activities can be considered as vertical integration. Technology intensity is captured by the R&D expenditure while spatial agglomeration is captured by the belonging of firms to industrial districts as defined according to the Sforzi-ISTAT procedure. On the basis of these data we test different econometric specifications to detect the statistical relevance of technology, spatial agglomeration and their interaction in explaining firms’ vertical integration.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa06p286.

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Date of creation: Aug 2006
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Handle: RePEc:wiw:wiwrsa:ersa06p286
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  1. Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2004. "Vertical Integration and Technology: Theory and Evidence," NBER Working Papers 10997, National Bureau of Economic Research, Inc.
  2. Francesco Brioschi & Maria Sole Brioschi & Giulio Cainelli, 2002. "From the industrial district to the district group: An insight into the evolution of capitalism in italy1," Regional Studies, Taylor & Francis Journals, vol. 36(9), pages 1037-1052.
  3. Glaeser, Edward L & Hedi D. Kallal & Jose A. Scheinkman & Andrei Shleifer, 1992. "Growth in Cities," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1126-52, December.
    • Glaeser, Edward Ludwig & Kallal, Hedi D. & Scheinkman, Jose A. & Shleifer, Andrei, 1992. "Growth in Cities," Scholarly Articles 3451309, Harvard University Department of Economics.
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  5. Stuart S. Rosenthal & William C. Strange, 2003. "Geography, Industrial Organization, and Agglomeration," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 377-393, May.
  6. Teece, David J. & Rumelt, Richard & Dosi, Giovanni & Winter, Sidney, 1994. "Understanding corporate coherence : Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 23(1), pages 1-30, January.
  7. Gilles Duranton & Diego Puga, 2000. "Nursery Cities: Urban diversity, process innovation, and the life-cycle of products," Working Papers dpuga-00-01, University of Toronto, Department of Economics.
  8. Giles Duranton & Diego Puga, 2003. "Micro-Foundations of Urban Agglomeration Economies," NBER Working Papers 9931, National Bureau of Economic Research, Inc.
  9. Goto, Akira, 1982. "Business groups in a market economy," European Economic Review, Elsevier, vol. 19(1), pages 53-70.
  10. Michael D. Whinston, 2001. "Assessing the Property Rights and Transaction-Cost Theories of Firm Scope," American Economic Review, American Economic Association, vol. 91(2), pages 184-188, May.
  11. Heitor Almeida & Daniel Wolfenzon, 2005. "A Theory of Pyramidal Ownership and Family Business Groups," NBER Working Papers 11368, National Bureau of Economic Research, Inc.
  12. Ottati, Gabi Dei, 1994. "Trust, Interlinking Transactions and Credit in the Industrial District," Cambridge Journal of Economics, Oxford University Press, vol. 18(6), pages 529-46, December.
  13. Donato Iacobucci, 2002. "Explaining business groups started by habitual entrepreneurs in the Italian manufacturing sector," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 14(1), pages 31-47, January.
  14. Giulio Cainelli & Donato Iacobucci & Enrica Morganti, 2006. "Spatial agglomeration and business groups: New evidence from Italian industrial districts," Regional Studies, Taylor & Francis Journals, vol. 40(5), pages 507-518.
  15. Jacquemin, Alexis P & Berry, Charles H, 1979. "Entropy Measure of Diversification and Corporate Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 359-69, June.
  16. Giulio Cainelli & Riccardo Leoncini, 1999. "Externalities and long-term local industrial development. Some empirical evidence from Italy," Revue d'Économie Industrielle, Programme National Persée, vol. 90(1), pages 25-39.
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