Why do Firms Own Production Chains?

50 Pages Posted: 8 Oct 2009

See all articles by Ali Hortacsu

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Chad Syverson

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Date Written: September 1, 2009

Abstract

Many firms own links of production chains- i.e., they own both upstream and downstream plants in vertically linked industries. We use broad-based yet detailed data from the economy’s goods-producing sectors to investigate the reasons for such vertical ownership. It does not appear that vertical ownership is usually used to facilitate transfers of goods along the production chain, as is often presumed. Shipments from firms’ upstream units to their downstream units are surprisingly low, relative to both the firms’ total upstream production and their downstream needs. Roughly one-third of upstream plants report no shipments to their firms’ downstream units. Half ship less than three percent of their output internally. We do find that manufacturing plants in vertical ownership structures have high measures of “type” (productivity, size, and capital intensity). These patterns primarily reflect selective sorting of high plant types into large firms; once we account for firm size, vertical structure per se matters much less. We propose an alternative explanation for vertical ownership that is consistent with these results. Namely, that rather than moderating goods transfers down production chains, it instead allows more efficient transfers of intangible inputs (e.g., managerial oversight) within the firm. We document some suggestive evidence of this mechanism.

Suggested Citation

Hortacsu, Ali and Syverson, Chad, Why do Firms Own Production Chains? (September 1, 2009). US Census Bureau Center for Economic Studies Paper No. CES 09-31, Available at SSRN: https://ssrn.com/abstract=1484921 or http://dx.doi.org/10.2139/ssrn.1484921

Ali Hortacsu

University of Chicago - Department of Economics ( email )

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Chad Syverson (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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