Vertical Integration and Investor Protection in Developing Countries

39 Pages Posted: 29 Nov 2009

See all articles by Rocco Macchiavello

Rocco Macchiavello

University of Oxford - Nuffield College of Medicine; Centre for Economic Policy Research (CEPR)

Date Written: November 24, 2009

Abstract

The industrial organization of developing countries is characterized by the pervasive use of subcontracting arrangements among small, financially constrained firms. This paper asks whether vertical integration relaxes those financial constraints. It shows that vertical integration trades off the benefits of joint liability against the costs of rendering the supply chain more opaque to external investors. In contrast to the commonly held view that pervasive input and capital market imperfections are conducive to vertical integration, the model predicts that the motives for vertical integration are not necessarily higher in developing countries. In particular, vertical integration is more likely to arise at intermediate levels of investor protection and better contract enforcement with suppliers reduces vertical integration only if financial markets are sufficiently developed. Evidence supporting both predictions is discussed.

Keywords: Vertical Integration, Industrial Development, Financial Constraints, Joint Liability, Trade Credit, Community-based Industries

JEL Classification: O12, O16, D23, G3, L22

Suggested Citation

Macchiavello, Rocco, Vertical Integration and Investor Protection in Developing Countries (November 24, 2009). FEEM Working Paper No. 86.2009. Available at SSRN: https://ssrn.com/abstract=1512496 or http://dx.doi.org/10.2139/ssrn.1512496

Rocco Macchiavello (Contact Author)

University of Oxford - Nuffield College of Medicine ( email )

New Road
Oxford, OX1 1NF
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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