Determinants of vertical integration in export processing: theory and evidence from China
Fernandes, Ana P.
Journal of Development Economics
Copyright © 2012 Elsevier B.V. Open access under CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/)
This paper examines the determinants of vertical integration versus outsourcing in export processing, by exploiting the coexistence of two export processing regimes in China, which designate by law who owns and controls the imported components. Based on a variant of the Antràs-Helpman (2004) model, we show theoretically that control over imported components for assembly can affect firm integration decisions. Our empirical results show that when Chinese plants control the use of components, the export share of foreign-owned plants is positively correlated with the intensity of inputs provided by the headquarter (capital, skill, and R&D). These results are consistent with the property-rights theory of intra-firm trade. However, when foreign firms own and control the components, there is no evidence of a positive relationship between the intensity of headquarters' inputs and the prevalence of vertical integration. The results are consistent with our model that considers control over imported components as an alternative to asset ownership to alleviate hold-up by export-processing plants.
Open Access article
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Development Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Development Economics (2012), DOI: 10.1016/j.jdeveco.2012.05.004
Vol. 99 (2), pp. 396 - 414