Skip to main content

Advertisement

SpringerLink
Log in

Backward and Forward Integration Along Global Value Chains

  • Published:
Review of Industrial Organization Aims and scope Submit manuscript

Abstract

Both backward (upstream) and forward (downstream) vertical integration strategies shape the organization of global value chains (GVCs). Yet, many studies make the unrealistic assumption that integration decisions are binary and one-directional. That is, for each production stage, companies make the integration decision only once, and this can be either backward or forward but not in both directions. The aim of this paper is to analyze the firm-level organization of GVCs when both vertical integration decisions are taken into account. Exploiting a global sample of more than 1.4 million firms, we first document how midstream parents, which actually integrate on both directions along the chain, are at least as common as downstream and upstream parents. We then find that parent companies prefer to integrate production stages with a relatively low elasticity of substitution and with a technological proximity on the supply chain. Finally, we provide evidence that more than one subsidiary in a given location can perform the same production stage.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6

Similar content being viewed by others

Notes

  1. Downstreamness metrics are sourced from Antràs and Chor (2013). See Sect. 3 for more details on how firm-level data are matched by industry affiliations with industry characteristics.

  2. MengXiao (2019) finds that, if each industry pair is weighted by its total number of seller-buyer relationships, 62% of the industry pairs feature the coexistence of backward and forward integration.

  3. We follow international standards for the identification of parents and subsidiaries of MNEs (OECD 2005; UNCTAD 2009; UNCTAD 2016), according to which a subsidiary is controlled after a (direct or indirect) concentration of voting rights (> 50%). See also Rungi et al. (2019). Similar data structures have been used in Alviarez et al. (2016), Cravino and Levchenko (2016), and Rungi and Del Prete (2018).

  4. We adopt official correspondence tables from NAICS to 2002 I-O industry codes (IO2002) provided by US Bureau of Ecnomic Analysis.

  5. A key difference with these previous studies is, however, that we also consider output industries. Please note how we make use of primary activities although parents can report several secondary activities different from the primary. In this case, we check that headquarters’ secondary activities can be found as primary activities of the subsidiaries in 99.2% of cases.

  6. There are also recurrent yet counterintuitive results of positive effects of contractibility on integration in the property rights literature (Baker and Hubbard 2004; Nunn and Trefler 2013; Defever and Toubal 2013).

  7. The duplication of tasks also exists when we check for’pure’ vertical integration strategies—excluding horizontal integration decisions—for affiliates that report the same downstreamness of the parent. In this case we find that 24% of affiliates perform tasks that are already integrated within the corporate boundary.

  8. In Table 8 in “Appendix”, we show that our results are robust to the implementation of a probit model.

References

  • Acemoglu, D., Antràs, P., & Helpman, E. (2007). Contracts and technology adoption. American Economic Review, 97(3), 916–943.

    Article  Google Scholar 

  • Acemoglu, D., Griffith, R., Aghion, P., & Zilibotti, F. (2010). Vertical integration and technology: Theory and evidence. Journal of the European Economic Association, 8(5), 989–1033.

    Article  Google Scholar 

  • Alfaro, L., & Charlton, A. (2009). Intra-industry foreign direct investment. American Economic Review, 99(5), 2096–2119.

    Article  Google Scholar 

  • Alfaro, L., Chor, D., Antras, P., & Conconi, P. (2019). Internalizing global value chains: A firm-level analysis. Journal of Political Economy, 127(2), 508–559.

    Article  Google Scholar 

  • Alfaro, L., Conconi, P., Fadinger, H., & Newman, A. (2016). Do prices determine vertical integration? Review of Economic Studies, 83, 1–35.

    Article  Google Scholar 

  • Alviarez, V., Cravino, J., & Levchenko, A. A. (2016). The growth of multinational firms in the great recession. Journal of Monetary Economics, 85, 50–64.

    Article  Google Scholar 

  • Antràs, P. (2003). Firms, contracts, and trade structure. The Quarterly Journal of Economics, 118(4), 1375–1418.

    Article  Google Scholar 

  • Antràs, P., & Chor, D. (2013). Organizing the global value chain. Econometrica, 81(6), 2127–2204.

    Article  Google Scholar 

  • Antràs, P., & De Gortari, A. (2020). On the geography of global value chains. Econometrica. Forthcoming.

  • Antràs, P., & Helpman, E. (2004). Global sourcing. Journal of Political Economy, 112(3), 552–580.

    Article  Google Scholar 

  • Atalay, E., Hortaçsu, A., Li, M. J., & Syverson, C. (2019). How wide is the firm border? The Quarterly Journal of Economics, 134(4), 1845–1882.

    Article  Google Scholar 

  • Baker, G. P., & Hubbard, T. N. (2004). Contractibility and asset ownership: On-board computers and governance in US trucking. The Quarterly Journal of Economics, 119(4), 1443–1479.

    Article  Google Scholar 

  • Bartlett, C. A., & Ghoshal, S. (2000). Going global. Harvard Business Review, 78(2), 132–141.

    Google Scholar 

  • Broda, C., & Weinstein, D. (2006). Globalization and the gains from variety. Quarterly Journal of Economics, 121(2), 541–585.

    Article  Google Scholar 

  • Cravino, J., & Levchenko, A. A. (2016). Multinational firms and international business cycle transmission. The Quarterly Journal of Economics, 132(2), 921–962.

    Article  Google Scholar 

  • Defever, F., & Toubal, F. (2013). Productivity, relationship-specific inputs and the sourcing modes of multinationals. Journal of Economic Behavior & Organization, 94, 345–357.

    Article  Google Scholar 

  • Del Prete, D., & Rungi, A. (2017). Organizing the global value chain: A firm level test. Journal of International Economics, 109, 16–30. https://doi.org/10.1016/j.jinteco.2017.08.003.

    Article  Google Scholar 

  • Giroud, X. (2013). Proximity and investment: Evidence from plant-level data. Quarterly Journal of Economics, 128, 861–915.

    Article  Google Scholar 

  • Grossman, S. J., & Hart, O. D. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94(4), 691–719.

    Article  Google Scholar 

  • Hart, O., & Moore, J. (1990). Property rights and the nature of the firm. Journal of Political Economy, 98(6), 1119–1158.

    Article  Google Scholar 

  • Kalnins, A., & Lafontaine, F. (2004). Multi-unit ownership in franchising: Evidence from the fast-food industry in Texas. RAND Journal of Economics, 35, 747–761.

    Article  Google Scholar 

  • Kalnins, A., & Lafontaine, F. (2013). Too far away? The effect of distance to headquarters on business establishment performance. American Economic Journal: Microeconomics, 5, 157–179.

    Google Scholar 

  • Lafontaine, F. (1992). Agency theory and franchising: Some empirical results. RAND Journal of Economics, 23(2), 263–283.

    Article  Google Scholar 

  • Lafontaine, F., & Shaw, K. L. (1999). The dynamics of franchise contracting: Evidence from panel data. Journal of Political Economy, 107(5), 1041–1080.

    Article  Google Scholar 

  • Lafontaine, F., & Slade, M. (2007). Vertical integration and firm boundaries: The evidence. Journal of Economic Literature, 45(3), 629–685.

    Article  Google Scholar 

  • MengXiao, L., (2019). The missing option in firm boundary decisions, mimeo.

  • Minkler, A. P., & Park, T. A. (1994). Asset specificity and vertical integration in franchising. Review of Industrial Organization, 9(4), 409–423.

    Article  Google Scholar 

  • Nunn, N. (2007). Relationship-specificity, incomplete contracts, and the pattern of trade. Quarterly Journal of Economics, 122(2), 569–600.

    Article  Google Scholar 

  • Nunn, N., & Trefler, D. (2013). Incomplete contracts and the boundaries of the multinational firm. Journal of Economic Behavior & Organization, 94, 330–344.

    Article  Google Scholar 

  • OECD. (2005). Guidelines for Multinational Enterprises. Paris: OECD.

    Book  Google Scholar 

  • Rauch, J. E. (1999). Networks versus markets in international trade. Journal of International Economics, 48(1), 7–35.

    Article  Google Scholar 

  • Rungi, A., & Del Prete, D. (2018). The smile curve at the firm level: Where value is added along supply chains. Economics Letters, 164, 38–42.

    Article  Google Scholar 

  • Rungi, A., Morrison, G., & Pammolli, F. (2019). Global ownership and hierarchies of firms. That which is essential is invisible to the eye, mimeo.

  • Scott, F. A. (1995). Franchising vs. company ownership as a decision variable of the firm. Review of Industrial Organization, 10(1), 69–81.

    Article  Google Scholar 

  • UNCTAD. (2009). Training manual on statistics for FDI and the operations of TNCs Vol. II. United Nations.

  • UNCTAD. (2016). World Investment Report 2016. United Nations.

  • Woodruff, C. (2002). Non-contractible investments and vertical integration in the Mexican footwear industry. International Journal of Industrial Organization, 20(8), 1197–1224.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Business and Economics, University of Naples Parthenope, Via Generale Parisi 13, 80132, Naples, Italy

    Davide Del Prete

  2. Laboratory for the Analysis of Complex Economic Systems, IMT School for Advanced Studies – Lucca, Piazza San Francesco 19, 55100, Lucca, Italy

    Armando Rungi

Authors
  1. Davide Del Prete
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Armando Rungi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Davide Del Prete.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 6, 7 and 8.

Table 6 Sample coverage
Full size table
Table 7 Descriptive statistics
Full size table
Table 8 Probit model for duplicating stages along GVCs
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Del Prete, D., Rungi, A. Backward and Forward Integration Along Global Value Chains. Rev Ind Organ 57, 263–283 (2020). https://doi.org/10.1007/s11151-020-09774-y

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11151-020-09774-y

Keywords

JEL Classification

Search

Navigation