Backward Versus Forward Integration of Firms in Global Value Chains

49 Pages Posted: 11 Jun 2021

See all articles by Peter H. Egger

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; ETH Zürich; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Katharina Erhardt

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Gerard Masllorens

ETH Zürich - KOF Swiss Economic Institute

Date Written: 2021

Abstract

Production processes are increasingly organized in international value-chain networks. The involved firms can be operating at arm’s length or be vertically integrated. Both the incidence and the direction of integration (backward or forward in the value chain) depend on specific characteristics of the firms and their economic environment. We propose a simple model of vertical integration in a supplier-producer relationship that is rooted in the property-rights theory to learn about the determinants of forward versus backward integrations. Generally, the profitability and direction of integration depend on the relative investment intensity of the producer and the supplier so as to align investment incentives and maximize joint surplus. Moreover, the organizational form depends on the fixed costs of firm integration and the market environment in the input market as well as the relative importance of the specific input for the final output. These results are strongly confirmed in a large panel of worldwide directed ownership linkages.

JEL Classification: L140, L220, L230, L240

Suggested Citation

Egger, Peter H. and Erhardt, Katharina and Masllorens, Gerard, Backward Versus Forward Integration of Firms in Global Value Chains (2021). CESifo Working Paper No. 9111, Available at SSRN: https://ssrn.com/abstract=3863814 or http://dx.doi.org/10.2139/ssrn.3863814

Peter H. Egger (Contact Author)

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

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ETH Zürich ( email )

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Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Katharina Erhardt

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Gerard Masllorens

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

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