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Abstract:

cover
CEP Discussion Paper
Organizing Global Supply Chains: Input-Output Linkages and Vertical Integration
Giuseppe Berlingieri, Frank Pisch and Claudia Steinwender November 2018
Paper No' CEPDP1583:
Full Paper (pdf)

JEL Classification: F10; F14; L16; L23; O14


Tags: vertical integration; supply chains; direct requirements; input output relationship; intrafirm trade

We study whether and how the technological importance of an input – measured by its cost share – is related to the decision of whether to “make” or “buy” that input. Using detailed French international trade data and an instrumental variable approach based on self-constructed input-output tables, we show that French multinationals vertically integrate those inputs that have high cost shares. A stylized incomplete contracting model with both ex ante and ex post inefficiencies explains why: technologically more important inputs are “made” when transaction cost economics type forces (TCE; favoring integration) overpower property rights type forces (PRT; favoring outsourcing). Additional results related to the contracting environment and headquarters intensity consistent with our theoretical framework show that both TCE and PRT type forces are needed to fully explain the empirical patterns in the data.