Institutional Determinants of Vertical Integration in China

Posted: 24 Nov 2015

See all articles by Joseph P. H. Fan

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK)

Jun Huang

Shanghai University of Finance and Economics

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Bernard Yin Yeung

National University of Singapore - Business School

Date Written: June 1, 2014

Abstract

Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. We report that Chinese firms in the 2000's are more vertically integrated than the U.S. firms in the 1990s. We find that vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. Further, firms led by insiders with political connection are more likely to be vertically integrated. Finally, vertical integration among politically unconnected firms is associated with elevated per capita GDP level and growth, while vertical integration among politically connected firms is unrelated to local economy performance.

Keywords: Vertical integration, Rent seeking, Institutional development, Government

JEL Classification: L22, P14, G38, P16

Suggested Citation

Fan, Joseph P. H. and Huang, Jun and Morck, Randall K. and Yeung, Bernard Yin, Institutional Determinants of Vertical Integration in China (June 1, 2014). Journal of Corporate Finance, Forthcoming; University of Alberta School of Business Research Paper No. 2694734. Available at SSRN: https://ssrn.com/abstract=2694734

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK)

Shatin, N.T.
Hong Kong
Hong Kong

Jun Huang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governence Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Bureau of Finance and Economic Research ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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