Firm Integration and Supply Chains

46 Pages Posted: 10 Jan 2020

See all articles by Shresth Garg

Shresth Garg

Harvard University, Department of Economics

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Brandon Tan

Harvard University, Department of Economics

Date Written: December 20, 2019

Abstract

Vertical integration is central to understanding patterns of economic activity, but there has been limited empirical work measuring the extent to which firms own and utilize direct upstream and downstream production links for sourcing physical inputs. We use administrative data from Karnataka, India on the movement of goods, both within and outside the firm, and find that 13% of input value can be sourced from vertically integrated upstream establishments. Of this potential 13%, somewhere between 30 - 40% of trade actually materializes. This suggests that the supply of physical goods along the production chain is an important rationale for vertical integration. Notably, within the set of vertically integrated firms, firms which source at least one product from within account for over three-quarters of economic activity. We look at factors associated with the decision to source a given product from within, and find that firm size, distance to outside and within firm suppliers, frequency of input requirement, product relationship specificity, volume, R&D requirements and competition both upstream and downstream are important factors. Finally, we look at factors associated with the ownership of an vertically integrated establishment and find that firm size, product specificity, R&D requirements and competition matter.

Keywords: India, e-way, GST, vertical integration, development, trade

JEL Classification: G34, F15, D23, F63

Suggested Citation

Garg, Shresth and Ghosh, Pulak and Tan, Brandon, Firm Integration and Supply Chains (December 20, 2019). Available at SSRN: https://ssrn.com/abstract=3507714 or http://dx.doi.org/10.2139/ssrn.3507714

Shresth Garg (Contact Author)

Harvard University, Department of Economics ( email )

Cambridge, MA 02138
6177108723 (Phone)

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Brandon Tan

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

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