Vertical Integration and Firm Performance

28 Pages Posted: 13 Aug 2008  

Yi Lu

School of Business, University of Hong Kong

Zhigang Tao

The University of Hong Kong - School of Business

Date Written: July 2008

Abstract

Theoretical and empirical research in the past decades has advanced our understanding of what determines the vertical boundary of a firm. An equally important but much less understood issue is the impacts of vertical integration on firm performance, mainly because the decision on vertical integration is endogenously determined. In this paper, using a survey of China's manufacturing firms conducted by the World Bank, we establish the causal impacts of vertical integration on firm performance by adopting the instrumental variable approach to deal with the endogeneity issue. We find that the degree of vertical integration causes a negative impact on firm sales, market share and productivity, but a positive impact on firm product prices. Our results lend support to the extent of market argument in the literature, and they are consistent with the stated reasons for the divesture decisions of many business corporations.

Keywords: Vertical Integration, Firm Performance, Instrumental Variable

JEL Classification: L22, D23, L25

Suggested Citation

Lu, Yi and Tao, Zhigang, Vertical Integration and Firm Performance (July 2008). Available at SSRN: https://ssrn.com/abstract=1222484 or http://dx.doi.org/10.2139/ssrn.1222484

Yi Lu (Contact Author)

School of Business, University of Hong Kong ( email )

Rm 730, Meng Wah Complex
Pokfulam Road
Hong Kong
Hong Kong
(852) 2241-5245 (Phone)
(852) 2858-5614 (Fax)

HOME PAGE: http://www.fbe.hku.hk/~luyi

Zhigang Tao

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China
(852) 2857-8223 (Phone)
(852) 2858-5614 (Fax)

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